W^Mismimmmim 


Lousiness 


FUNDS   AND   THEIR    USES 


A  Selection  of 

APPLETONS'    BUSINESS    BOOKS 

Retail  Selling  and  Store  Management,  by  Paul  H.  Nystrom 

Advertising  and  Selling,  by  H.  L.  Hollingworth 

The  Business  of  Advertising,  by  Earnest  Elmo  Calkins 

Modern  Advertising,  by  Earnest  Elmo  Calkins  and  Ralph  Holden 

Money  and  Banking,  by  John  Thorn  Holdsworth 

The  Modern  Bank,  by  Amos  K.  Fiske 

The  Work  of  Wall  Street,  by  Sereno  S.  Pratt 

Funds  and  Their  Uses,  by  Frederick  A.  Cleveland 

Credit  and  Its  Uses,  by  William  A.  Prendergast 

Rural  Credits,  by  Myron  T.  Herrick 

Interest  Tables  and  Formulae,  by  John  G.  Holden 

Financial  Crises,  by  Theodore  E.  Burton 

Corporation  Finance,  by  Edward  S.  Mead 

Trust  Finance,  by  Edward  S.   Mead 

The  Principles  of  Industrial  Management,  by  J.  C.  Duncan 

Modern  Industrialism,  by  Frank  L.  McVey 

Textiles,  by  Paul  H.  Nystrom 

Cost-Keeping  for  Manufacturing  Plants,  by  Sterling  H.   Bunnell 

Modern  Accounting,  by  Henry  Rand  Hatfield 

Accounting  Practice,  by  Clarence  M.  Day 

Elements  of  Accounting,  by  Joseph  J.  Klein 

A  First  Year  in  Bookkeeping  and  Accounting,    by   George   A. 
Macfarland  and  Irving  D.  Rossheim 

American  Corporations,  by  John  J.  Sullivan 

Corporations  and  the  State,  by  Theodore  E.  Burton 

American  Business  Law,  by  John  J.  Sullivan 

The  Essentials  of  Business  Law,  by  Francis  M.   Burdick 

Property  Insurance,  by  Solomon  S.  Huebner 

Life  Insurance,  by  Solomon  S.  Huebner 

The  Life  Insurance  Company,  by  William  Alexander 

Newspaper  Reporting  and  Correspondence,  by  Grant  Milnor  Hyde 

Newspaper  Editing,  by  Grant  Milnor  Hyde 

Practical  Journalism,  by  Edwin  L.  Shuman 

American  Railway  Transportation,  by  Emory  R.  Johnson 

Elements  of  Transportation,  by  Emory  R.  Johnson 

Ocean  and  Inland  Water  Transportation,  by  Emory  R.  Johnson 

Railroad  Traffic  and  Rates,  by  Emory  R.  Johnson  and  Grover  G. 

Huebner 

Railroad  Finance,  by  Frederick  A.  Cleveland  &  Fred  W.  Powell 
Railroad  Administration,  by  Ray  Morris 
Railroad  Accounting,  by  William  E.  Hooper 
Agricultural  Commerce,  by  G.  G.  Heubner 
Irrigation  Management,  by  Frederick  Haynes  Newell 
Irrigation  in  the  United  States,  by  R.  P.  Teele 

New  Volumes  Will  Be  Added  To  This  List  At  Frequent  Intervals 

D.  APPLETON  AND  COMPANY,  PUBLISHERS,  NEW  YORK 


FUNDS  AND  THEIR  USES 


A  BOOK  DESCRIBING  THE  METHODS, 
INSTRUMENTS,  AND  INSTITUTIONS  EMPLOYED 
IN  MODERN  FINANCIAL  TRANSACTIONS 


BY 

FREDERICK  A.  CLEVELAND,  PH.D. 

WHARTON    SCHOOL    OF    FINANCE    AND     ECONOMY 
UNIVERSITY    OF    PENNSYLVANIA 


WITH   At  ANT  ILLUSTRATIONS 


REVISED    EDITION 


NEW  YORK   AND   LONDON 

D.  APPLETON   AND   COMPANY 

1916 


COPYRIGHT,   1902,   1908 
BY  D.  APPLETON   AND   COMPANY 


PRINTED  IN  THE  UNITED  STATES  OF  AMERICA 


PREFACE 


EXCEPT  in  its  public  aspects,  the  subject  of  finance  has 
received  little  attention  at  the  hands  of  writers.  The  neces- 
sity for  funds  with  which  to  carry  on  King  William's  war 
with  France  gave  rise  to  the  Bank  of  England  and,  with 
it,  to  modern  funding  methods.  Nearly  all  of  the  great 
banks  and  banking  systems  of  the  past  have  grown  out  of 
public  rather  than  private  needs.  So  constantly  has  atten- 
tion been  drawn  to  funding  measures  of  Government,  that 
the  words  "  finance  "  and  "  funds  "  have  come  to  be  associ- 
ated almost  exclusively  with  public  affairs.  The  fast  in- 
creasing funds  in  private  institutions,  the  magnitude  of 
modern  industrial  and  commercial  undertakings,  the  large 
funding  operations  wholly  private  in  their  character  that 
have  gone  along  with  private  enterprise  during  the  last  dec- 
ade, have  awakened  an  interest  in  private  finance  far  ex- 
ceeding that  which  attaches  to  public  revenues  and  expendi- 
tures. Kecognizing  the  need  for  the  collection  and  coordi- 
nation of  data  in  this  branch  of  the  subject,  effort  has  been 
directed  toward  the  development  of  a  literature  such  as 
may  bring  the  facts  of  financial  life  within  the  reach  of  the 
reading  public.  This  larger  work  was  undertaken  some 
years  ago  in  cooperation  with  Dr.  Edward  S.  Meade,  of 
the  University  of  Pennsylvania.  The  present  essay  is  the 

2003440 


vi  PREFACE 

first  of  a  series  aiming  to  give  a  wide  survey  of  the  field 
of  finance. 

Looking  upon  the  subject  of  private  finance  as  one 
which  has  to  do  with  the  getting  and  spending  of  funds 
for  private  enterprise,  the  materials  of  this  book  have 
been  grouped  around  three  central  ideas,  viz. :  (1)  What 
are  Funds  ?  (2)  How  Funds  are  Obtained.  (3)  The  Insti- 
tutions and  Agencies  Employed  in  Funding  Operations. 
The  more  technical  fields  of  financiering — the  several  de- 
partments of  financial  operation — are  reserved  for  subse- 
quent essays.  In  Part  I  the  various  forms  of  money  and 
credit  used  as  funds,  and  the  means  of  transfer  of  credit 
funds,  are  discussed.  An  understanding  of  the  nature  of 
funds  is  regarded  as  fundamental.  Part  II,  which  has  for 
its  subject  "  IIo\v  Funds  are  Obtained,"  divides  modern 
funding  methods  into  two  classes,  namely,  (1)  the  methods 
of  the  industrially  and  socially  dependent,  and  (2)  the 
methods  of  the  industrially  and  socially  independent — i.  e., 
those  who  depend  upon  active  participation  in  business. 
The  only  method  by  which  the  former  may  obtain  funds 
is  that  of  gift  and  inheritance,  which  is  the  title  of  Chapter 
IV;  in  this  the  consideration  is  one  of  personal  attach- 
ment and  direct  appeal.  The  funding  method  of  the 
second  class,  those  actively  cooperating  in  industrial  life, 
is  that  of  exchange.  The  consideration  for  exchange  is 
one  of  "  value."  In  business  there  is  but  one  way  of 
obtaining  funds — that  is,  to  have  something  to  sell,  some- 
thing for  which  those  having  funds  are  willing  to  ex- 
change them.  To  this  method  several  chapters  are 
given.  Those  without  capital  or  other  property  must 
resort  to  sales  of  labor.  The  limitations  of  the  laborer, 
the  advantages  of  education  and  industrial  training,  and 


PREFACE  vii 

savings  as  a  means  of  obtaining  industrial  capital,  are 
some  of  the  important  considerations  for  this  class.  Those 
possessed  of  property  or  established  business  may  avail 
themselves  of  methods  which  are  made  the  subject  of  the 
three  concluding  chapters  of  Part  II.  For  illustration  of 
instruments  and  methods,  those  actively  employed  in  the 
market-place  have  been  used.  In  their  reproduction,  how- 
ever, it  has  been  necessary  to  reduce  all  exhibits  to  type- 
page  dimensions.  Engravings  of  checks,  notes,  scrip, 
drafts,  etc.,  are  about  one-fourth  of  the  size  of  the  originals 
from  which  they  are  made.  Stocks,  bonds,  and  the  larger 
security  documents  are  in  some  instances  reduced  to  one- 
eighth  of  their  original  size.  In  Part  III  a  chapter  has  been 
given  to  each  of  the  leading  financial  institutions.  The 
labor  of  collecting  the  data  and  illustrations  in  many  cases 
must  have  proved  fruitless  had  it  not  been  for  the  friendly 
assistance  of  those  in  control  of  financial  concerns,  and 
those  in  possession  of  instruments  acquired  by  years  of  con- 
tact with  financial  life.  In  this  relation  I  am  especially 
indebted  to  Mr.  Charles  C.  Harrison,  Jr.,  of  the  banking 
and  broking  firm  of  McMichael  &  Co. ;  Mr.  John  C.  Daw- 
son,  of  the  banking  house  of  Brown  Brothers ;  Mr.  L.  Gr. 
Fouse,  President  of  the  Fidelity  Mutual  Life  ;  Dr.  Stewart 
Culm,  Curator  of  the  Free  Museum  of  Arts  and  Sciences 
of  the  University  of  Pennsylvania  ;  Mr.  Herbert  G.  Stock- 
well,  and  Mr.  H.  A.  Chambers. 

F.  A.  C. 
UNIVERSITY  OF  PENNSYLVANIA. 


CONTENTS 


CHAPTER  PAGB 

I. — INTRODUCTORY 1 

PART  I 
WHAT  ABE  FUNDS f 

II.— MONEY  FUNDS 11 

III. — CREDIT  FUNDS 30 

IV. — INSTRUMENTS  OF  TRANSFER  OF  CREDIT  FUNDS        ...  55 

PART  II 

HOW  FUNDS  .LRE  OBTAINED 

V. — FUNDS   OBTAINED    BY   GIFT   AND    INHERITANCE.           ...  79 

VI.— FUNDS   OBTAINED  BY    EXCHANGE 89 

VII. — FUNDS   OBTAINED    BY   SALES  OF    COMMERCIAL   CREDIT        .           .  109 

VIII. — FUNDS   OBTAINED   BY   SALES  OF    LONG-TIME   PAPER  .           .           .  149 

PART  III 

INSTITUTIONS  ANI    AGENTS  EMPLOYED  IN  FUNDING 
OPERATIONS 

IX.— THE  UNITED  STATES  TREASURY     .        .       .       .       .        .195 

X.— THE  SAVINGS-BANK 209 

XI. — THE   BUILDING   LOAN    ASSOCIATION 229 

XII. — THE   COMMERCIAL   BANK 240 

XIII.— THE  TRUST  COMPANY 256 

XIV. — THE  BROKER  AND  THE  BROKERS1  BOARD     ....  265 

XV.— THE  INSURANCE  COMPANY 282 

INDEX  .299 


LIST  OF  ILLUSTKATIONS 


PAGE 

Copper-sheet  money 19 

Silver-sheet  money 23 

Note  of  first  Bank  of  United  States 42 

Note  of  second  Bank  of  the  United  States 43 

Note  of  Southern  Bank  of  Kentucky 43 

'Note  of  Exchange  Bank  of  St.  Louis 44 

Note  of  Tioga  County  Bank 44 

Certificate  of  Chattanooga  Savings- Bank 46 

Clearing-house  certificate 46 

Scrip  of  Easton  &  Wilkesbarre  Turnpike  Company    .        .        .        .47 

Sutler's  scrip 47 

Store  scrip 48 

Camden  &  Woodbury  Railroad  scrip 48 

Chesapeake  &  Ohio  Canal  scrip 49 

Marion  Change  Association  scrip 49 

Patapsco  Bank  certificate  of  deposit 49 

Dividend  warrant 50 

Town  scrip  of  Fayetteville,  Ark 51 

Scrip  of  Port  Deposit 52 

Port  Deposit,  loan,  1862 52 

Check  of  Pulaski  National  Bank .        .56 

Andrew  Jackson's  check  on  Bank  of  United  States     .        .        .        .57 
Daniel  Webster's  check  on  Bank  of  United  States      .        .        .        .58 

Wages  check  of  Lehigh  Valley  Railroad 60 

Dividend  check 61 

Coal  shipper's  check 61 

Receipt  used  as  check 62 

Daniel  Webster's  power  of  attorney 63 

Crossed  check 64 

Certified  check 65 

Cashier's  check 66 

Bank  draft,  Bank  of  United  States 67 

Express  money-order .       ..        .68 

xi 


LIST  OP  ILLUSTRATIONS 


Letter  of  credit    ...........  69 

Draft  list  to  letter  of  credit         ........  70 

American  Express  Company's  traveler's  check  .....  70 

Brown  Brothers'  traveler's  check         .......  71 

Identification  signature  on  same         .......  72 

Knauth  Nachod  &  KQhne's  traveler's  check       .....  73 

Interchangeable  bank  money-order     .......  74 

Share  of  stock  in  Bank  of  United  States    ......  97 

Common  stock  of  United  States  Steel  Corporation    ....  99 

Non-cumulative  preferred  stock          .......  101 

Common  stock  of  Gramercy  Finance  Company          ....  102 

Preferred  stock  (cumulative)  of  Gramercy  Finance  Company  .        .  103 

Standard  Oil  Company  certificate        .......  105 

First  preferred  trust  certificate,  Reading  Company   ....  107 

Promissory  note  (non-negotiable)        .......  112 

"     (without  payee)          .......  112 

"     (negotiable)        ........  113 

"             "     (negotiable  by  delivery)    ......  113 

"     (joint  and  several)    .......  114 

Interest  note         ...........  115 

Note  with  waiver  of  grace   .........  116 

Signature  "  His  mark  "        .........  117 

"  Value  received"  and  "  without  defalcation"   .....  117 

"Credit  the  drawer  "  note   .........  118 

Accommodation,  credit  the  drawer  note     ......  119 

Assignment  of  note      ..........  121 

"  Without  recourse  "  indorsement       .......  121 

Indorsed  guarantee      ..........  122 

Detached  guarantee  of  note         ........  122 

"Iron-clad  "  collateral  note          ........  123 

Memorandum  collateral  note      ........  124 

Judgment  note  (simple  form)      ........  125 

Judgment  note  with  power  of  attorney      ......  125 

Collateral  judgment  note    .........  126 

Notice  of  non-payment        .........  128 

Note  with  waiver  notice  of  non-payment    ......  129 

Protested  note      ...........  130 

Notarial  notice  of  protest    .........  130 

Notarial  certificate  of  protest      ........  131 

Account  stated     .......  .134 

"       settled     .......        .'.'.'.'  135 

"      paid        .       .                                                                    .  136 


LIST  OP  ILLUSTRATIONS  xiii 


Memorandum  of  settlement  and  due-bill 137 

Commercial  draft  (simple  form) 137 

London  draft  of  Bank  of  United  States 139 

Sight-draft 140 

Documented  bill — invoice 142 

Bill  of  lading  attached  to  draft 143 

Insurance  policy  on  shipment 144 

Draft  of  Burnham,  Williams  &  Company 145 

Advice  of  sale  of  draft 146 

Balance  sheet 152 

Mortgage  note 154 

Mortgage  securing  note 155 

Parti-mortgage  receipt 158 

Collateral  gold  receipt 160 

Collateral  trust  certificate  of  Asphalt  Company        ....  162 

Individual  private  bond 163 

Receipt  for  money  deposited  on  bond  purchase         ....  165 

Same,  purchase  Glen  Echo  Railroad  bonds 166 

Unsecured  bond,  Bank  of  United  States 167 

Real  estate  bond 168 

Guarantee  of  bonds 169 

Individual  real  estate  bond 170 

Guarantee  of  Reading  Terminal  bonds 171 

Indorsement  of  bonds 172 

General  mortgage  bond  of  Reading  Company 175 

Car-trust  bond  of  the  Railroad  Equipment  Company        .        .        .  177 

Same,  American  Transportation  Company 179 

Debenture  bond 180 

Income  gold  bond 182 

Chesapeake  &  Ohio  purchase  money  bond 184 

Improvement  bond  of  Reading  Railroad  Company   ....  186 

Bond  extension  contract 188 

Exhibit  in  sale  of  note  broker 266 

Release  from  liability  on  indorsement 266 

Memorandum  of  note  purchase 267 

Memorandum  of  note  sale 267 

Floor  plan  of  Philadelphia  Stock  Exchange 275 

Philadelphia  board-room  of  Haight,  Freese  &  Company  .        .        .278 

Haight,  Freese  &  Company's  chart  of  private  wires  ....  280 


CHAPTER  I 
FUNDS  AND  THEIR  USES— INTRODUCTORY 

AMONG  the  first  ideas  that  one  gets  from  early  associa- 
tion is  a  notion  of  respect  for  the  "property"  of  others; 
we  soon  come  to  know  that  there  is  a  differ- 
ence between  those  things  which  we  may  call 
"  our  own  "  and  those  things  which  "  belong "  to  another. 
Parental  authority  within  the  family  first  impresses  the 
lesson  ;  later,  association  with  playmates  enforces  it.  Any 
attempt  to  violate  what  are  commonly  recognized  in  the 
community  as  "rights  of  property"  brings  us  to  grief. 
The  jealousy  with  which  the  child  guards  his  right  to  use 
his  own  top,  his  own  marbles,  his  own  knickknacks,  and 
the  respect  which  he  comes  to  have  for  things  displayed  in 
shop- windows  or  in  the  possession  of  his  playmates,  illus- 
trate the  force  with  which  ideas  of  property  are  early  im- 
pressed upon  the  race. 

No  sooner,  however,  does  the  child  come  to  know  the 
use  of  things,  or  begin  to  long  for  objects  that  attract  his 
jjow  notice,  than  he  learns  that  the  "consent"  of 

property  is  some  one  must  be  obtained  before  they  may  be 
acquired.  taken.  From  a  parent,  a  sister,  or  a  brother — 
members  of  the  household — this  consent  may  be  had  for 
the  asking ;  within  the  family,  acquisition  takes  the  form  of 
"gift."  From  others,  however — those  not  bound  by  ties 
of  affection  or  mutual  regard — a  mere  request  is  not  suf- 
ficient. In  front  of  a  shop  is  a  basket  of  apples.  Their  rich 

1 


2  FUNDS  AND  THEIR  USES 

color  and  fragrance  suggest  to  the  child  passing  that  he 
would  like  to  have  some  of  the  fruit.  He  asks  the  shop- 
keeper—seeks to  obtain  an  apple  "  by  gift,"  as  he  had  been 
accustomed  to  do  at  home.  His  request  is  refused.  How 
is  he  to  obtain  the  coveted  fruit?  The  shopkeeper  helps 
him  out  of  the  difficulty.  "  Have  you  a  penny  ?  "  "  No." 
"  If  you  will  get  me  a  penny  I  will  let  you  have  an  apple." 
With  this  suggestion  the  boy  has  his  first  idea  in  finance. 
He  runs  to  his  father,  obtains  a  penny  "  by  gift,"  and, 
returning,  "exchanges"  it  for  an  apple.  Thus  he  learns 
how  the  "consent"  of  shopkeepers  may  be  won,  and  that 
this  is  a  second  method  by  which  the  property  of.  others 
may  be  acquired. 

Exchange  lies  at  the  foundation  of  the  world's  industrial 
progress.  The  story  of  Crusoe  serves  well  to  illustrate  the 
possibilities  of  life  without  it.  Among  a  primitive  people 
centuries  may  be  required  to  obtain  the  metals  needed  for 
weapons  and  a  few  rude  implements.  We  have  but  to 
reflect  upon  the  many  thousands  of  things  about  the  mod- 
ern household,  each  of  which  contributes  a  share  to  comfort 
or  pleasure,  to  realize  how  incapable  man  would  be  to 
provide  for  himself.  How  long,  for  example,  would  it  take 
a  man,  working  alone,  to  extract  from  nature  a  pound  of 
iron  ?  Having  the  metal  in  hand,  how  long  must  he  labor 
to  make  a  needle  or  a  screw  ?  Few  of  the  common  things 
in  use  to-day  could  be  had  at  all ;  they  are  each  the  product 

Exchange  the  °f  hands  wnose  ski11  has  come  from  years  of 
chief  method  experience  and  training,  working  with  pro- 
°proper^n9  ™^e*  *^  appliances  inherited  from  a  society 
that  has  labored  for  centuries  past — a  coopera- 
tive society  in  which,  without  exchange,  cooperation  would 
have  been  impossible.  In  every  instance,  increased  facil- 
ities of  exchange  have  led  to  a  wider  range  of  social 
and  industrial  activity.  To  its  development  we  owe  the 
economies  of  division  of  labor,  the  benefits  of  the  fac- 
tory system,  the  larger  return  and  more  intelligent  con- 


INTRODUCTORY  3 

trol,  coming  from  differentiation  and  centralization  of  in- 
dustries— in  fact,  every  mile-stone  of  human  progress  has 
engraved  upon  it  the  significant  emblem  "  Exchange." 

Out  of  exchange  arises  the  necessity  for  "  funds."  In 
business  parlance  there  is  probably  no  word  so  big  with 
Importance  meaning  as  this  one.  "  If  I  could  get  the  nec- 
of  funds  in  essary  funds,"  says  the  blacksmith,  "  I  would 
build  a  wagon  shop."  The  grocer  does  not 
add  to  his  stock  of  sugar  when  the  price  is  low  "  for  lack 
of  funds."  "  We  are  in  need  of  funds,"  says  the  building 
contractor  to  his  partner — "  we  must  have  at  least  $1,000 
more  to  pay  our  men."  "  Our  funds  are  running  low,"  says 
the  miller's  clerk ;  "  we  must  realize  on  outstanding  bills, 
or  make  some  other  arrangement  to  meet  obligations  matur- 
ing on  the  first  of  the  month."  It  is  out  of  just  such  situa- 
tions and  just  such  problems  that  the  business  of  finance 
arises.  "  Funds  "  are  the  key  to  business  under  an  economy 
of  exchange — a  necessary  part  of  business  equipment. 

Business  is  said  to  be  a  contest  in  which  every  one  is 
striving  for  the  same  thing.  This  is  not  entirely  true,  yet 
one  has  but  to  look  out  on  Broadway  or  any  main  thorough- 
fare of  a  great  city  to  be  impressed  with  the  fact  that  some 
kind  of  contest  is  going  on.  Men  are  hurrying 
business 't  to  an(*  ^ro'  pushing  each  other  about,  each  try- 
ing to  get  somewhere,  to  do  something  one  does 
not  know  what.  But  it  is  evident  that  each  has  something 
very  definite  in  mind  and  that  he  is  straining  every  nerve 
and  muscle  to  accomplish  a  purpose.  What  is  it  that  brings 
these  millions  into  the  street,  takes  them  to  the  shops, 
causes  some  to  stand  behind  counters  and  others  to  work 
and  sweat  before  a  furnace  ?  Each  seems  to  be  working 
and  striving  in  a  different  way,  but  if  you  ask  the  clerk  or 
the  foundryman,  the  day-laborer  or  the  banker,  what  he  is 
striving  for,  each  will  make  the  same  answer.  "I  am  not 
in  business  for  my  health,"  is  a  saying  which  expresses  a 
great  deal  of  truth.  Each  one  has  certain  wants  and  desires 
2 


4  FUNDS  AND  THEIR  USES 

to  satisfy.  On  all  sides  are  found  the  requisite  materials. 
To  gain  those  things  which  will  satisfy  desire,  in  an  orderly 
and  peaceful  way,  is  the  aim  of  business.  Under  an  indus- 
trial regime,  based  on  exchange,  the  quest  of  business  is  for 
"  profits."  The  success  of  a  business  enterprise  is  measured 
by  its  "profits" — i.  e.,  the  gains  to  proprietors  made 
through  it.  Profits,  however,  are  measured  by  the  standard 
of  increased  or  decreased  ability  to  resolve  one's  property 
into  funds. 

A  peaceful  contest  must  have  rules  to  govern  it,  for 
without  rules  there  would  be  violence  between  parties.  A 
number  of  marbles  are  placed  within  a  ring ;  a  line  is 
drawn,  behind  which  each  player  must  stand  for  the  first 
throw ;  the  one  who  lands  his  marble  nearest  the  center 
takes  first  shot.  So  the  rules  are  laid  down  for  the  begin- 
ning of  the  game.  After  the  contest  is  over  each  counts 
the  marbles  which  he  has  driven  out  of  the  ring.  Each 
player  has  put  in  two  marbles  as  "  counters."  At  the  end, 

one  has  scored  three ;  he  is  one  marble  ahead, 
Necessity  for       •,  .,        ,  ,  ,  i         i   «  i 

law  and          while  the  other  player  has  driven  out  but  one 

order  in  — he  has  lost  a  marble.  There  must  be  a  rule 
business.  ,.  .,,.-.  , 

for  every  possible  situation  and  every  point  at 

issue,  otherwise  the  game  could  not  proceed.  The  one  boy 
would  not  allow  the  other  to  take  his  marble  (his  property) 
unless  he  did  it  according  to  rules  understood  by  both  at 
the  beginning.  The  same  is  true  of  football,  baseball, 
lacrosse,  every  contest  for  points.  Not  only  must  the  rules 
be  known,  but  they  must  also  be  strictly  observed.  In  case 
of  a  dispute  as  to  what  the  rules  are,  or  how  they  should  be 
applied,  the  parties  may  come  to  a  subsequent  agreement, 
or,  failing  in  this,  they  may  refer  the  point  at  issue  to  some 
one  not  in  the  game  who  knows  the  rules.  He  who  does 
not  play  "  fair "  may  have  some  of  his  points  taken  away, 
or,  on  continued  offense,  may  be  "  ruled  out  of  the  game." 
Business  is  a  contest  in  which  the  "counters"  are 
money.  Business  law  is  nothing  more  nor  less  than  the 


INTRODUCTORY  5 

rules  governing  the  contest.  The  honest  man  is  the  one 
who  plays  according  to  rule.  A  law-breaker  not  only  runs 
the  risk  of  losing  points  (i.  e.,  of  being  "  penalized  ")  but  he 
may  be  "ruled  out."  This  may  be  done  by  his  fellows 
refusing  longer  to  do  business  with  him,  or  by  his  being 
"  locked  up," — put  in  jail  as  often  as  he  breaks  the  rale. 
Business  may  be  a  very  large  game.  The  whole  world  is 
the  field,  and  its  rules  must  be  understood  and  observed  by 

all  who  come  into  common  business  relations. 
fa£ine88  The  laws  of  business  must  be  common  to  all 

people  trading  together.  It  sometimes  happens 
that  those  known  as  civilized  people  attempt  to  do  business 
with  others  who  do  not  understand  their  rules  or  who  have 
different  ones.  This  is  like  two  sets  of  players  entering  a 
football  contest,  the  one  trying  to  play  "association  ball," 
and  the  other  trying  to  play  "  rugby."  Two  systems  of 
business  come  into  conflict.  The  rules  of  the  one  people 
must  be  made  to  conform  to  those  of  the  other  or  else  there 
will  be  trouble.  The  common  advantages  of  trade  are  so 
great  that  no  one  industrial  group  can  afford  to  shut  itself 
off.  In  fact,  no  barrier  is  strong  enough  to  preclude  men 
from  following  up  a  business  advantage  when  it  presents 
itself.  This  brings  the  people  of  all  nations  into  constant 
contact.  In  the  conflicts  between  systems,  the  stronger 
forces  the  weaker  to  change  its  rules.  The  importance  of 
obedience  to  rules  of  business  law  is  so  great  that  nations  as 
well  as  individuals  are  made  to  suffer  by  what  is  deemed 
a  violation  of  them.  That  "  honesty  is  the  best  policy  "  is 
a  saying  trite  but  true.  Whatever  may  be  said  of  the  atti- 
tude of  one  nation  toward  another,  no  single  individual  can 
afford  to  raise  even  a  suspicion  of  dishonest  conduct,  as 
this  would  cut  him  off  from  opportunity  and  preclude  him 
from  the  advantages  offered  by  broader  cooperation  with 
his  fellows,  cooperation  made  possible  by  confidence  in  fair 
dealing.  To  quote  a  saying  of  Mr.  Croker,  the  Democratic 
leader  of  New  York :  "  No  combination  can  be  made  where 


6  FUNDS  AND  THEIR  USES 

all  are  dishonest  and  each  one  knows  it.  The  first  element 
of  leadership  is  honesty,  perfect  honesty.  The  honest  man 
will  prevail  because  other  men  will  trust  him.  A  rascal 
can  trust  an  honest  man,  but  a  rascal  can  not  trust  a  rascal. 
You  may  take  one  hundred  men,  ten  of  them  honest  and 
ninety  of  them  false,  and  put  them  away  on  an  island; 
come  back  in  two  months  and,  for  the  reasons  I  have  given 
you,  you  will  find  the  ten  men  dominating  the  rest."  While 
Mr.  Croker  is  not  often  referred  to  for  standards  of  moral- 
ity, his  success  as  a  politician  has  depended  very  largely 
upon  his  recognition  of  the  advantage  of  strict  integrity 
among  his  political  followers,  and  the  advantage  of  fair 
play  is  even  more  striking  in  business  organization  and 
control. 

In  a  game,  two  conditions  are  prerequisite  to  success : 
(1)  An  intimate  knowledge  of  its  rules  ;  (2)  Skill  in  the  use 
of  the  instruments  employed.  A  knowledge  of  business 
laws,  and  skill  in  the  use  of  the  instruments  and  agents  by 
means  of  which  "  gains  "  are  to  be  made,  are  just  as  neces- 
sary to  business  success.  To  the  laborer — the  one  who 
relies  for  income  on  the  sale  of  his  labor,  who  subordinates 
his  own  business  or  talent  to  help  another  work  out  his 
schemes  for  gain — a  general  knowledge  of  law  may  be  of 
less  importance  than  skill  in  the  use  of  some  particular 
tool;  but  he  must  know  enough  of  the  rules  to  play  his 
part  well,  otherwise  he  will  not  be  able  to  render  service  to 
Elements  of  tne  manager  to  whom  he  engages  himself.  The 
sticcess  in  man  who  manages  a  business  plant  and  seeks 
income  from  the  sale  of  its  products  must 
equip  himself  in  a  different  way.  He  may  have  less  skill 
in  the  use  of  some  particular  instrument  than  has  the  man 
whom  he  employs,  but  he  must  know  the  use  of  instru- 
ments, and  know  the  manner  in  which  they  may  be  used 
by  others  to  the  highest  advantage  in  order  to  direct  the 
efforts  of  his  working  force  in  such  a  manner  as  to  make 
largest  gains  without  breaking  rules.  Like  a  football  cap- 


INTRODUCTORY  7 

tain,  he  must  know  how  to  manage  his  men  and  his  plant 
so  as  to  take  advantage  of  every  opening.  Business  is  co- 
Funds  a  operative.  A  man  can  not  do  business  alone. 
necessary  He  must  play  a  part.  He  must  be  properly 
Business  equipped  for  whatever  part  he  plays.  Business 
equipment.  training,  knowledge  of  the  law,  equipment 
adapted  to  the  enterprise,  materials,  services,  all  are  neces- 
sary, but  in  obtaining  these  the  first  need  is  for  "  funds." 
The  acquiring  of  funds  (capital),  therefore,  may  be  said  to 
be  the  first  step  in  providing  for  business  equipment  and 
business  success. 

Children  are  frequently  found  on  the  street  asking  for 
pennies.  They  have  learned  the  use  of  money  as  a  means 
of  obtaining  things  desired,  but  they  have  not  yet  risen 
above  the  most  primitive  knowledge  of  how  to  get  money. 
Their  fathers  and  mothers  may  provide  it  by  gift,  as  they 
would  also  provide  the  things  which  pennies  will  buy,  but 
those  not  moved  by  affection  or,  as  sometimes  happens,  by 
charity,  turn  a  deaf  ear  to  appeals  of  this  kind.  In  early 
Funds  the  Jear8j  "gifts"  based  upon  affection  afford  a 
subject  of  means  quite  adequate,  except  in  cases  of  inabil- 
finance.  ^  of  parent8  to  provide.  Generally  speaking, 

girls  and  women  throughout  their  lives  are  limited  to  this 
means  of  obtaining  funds.  Many  men  also  pass  their  lives 
in  this  fashion — they  obtain  all  things  desired  by  means  of 
funds  contributed.  Those  who  may  not  depend  upon  en- 
dowments of  ancestors,  and  those  engaged  in  active  business, 
have  quite  different  financial  problems  to  solve.  Finance 
is  that  branch  of  business  which  has  to  do  with  the  getting 
and  spending  of  funds  necessary  to  the  equipment  and 
management  of  enterprise.  A  student  of  finance  must  first 
consider  what  is  meant  by  "  funds."  When  a  business  man 
says  that  "  his  funds  are  running  low,"' what  does  he  mean  ? 
Does  he  mean  that  his  money  is  nearly  all  gone  ?  Perhaps 
he  has  not  had  more  than  a  dollar  in  his  purse  for  a  week, 
and  has  had  no  particular  use  for  that,  yet  he  has  been  car- 


8  FUNDS  AND  THEIR  USES 

rying  on  a  large  "  cash  "  business  all  the  time — has  had  no 
lack  of  "funds."  What  are  "funds"?  How  are  they 
obtained?  How  are  they  managed?  These  three  ques- 
tions answered,  the  whole  field  of  finance  will  have  been 
covered. 


PART   I 
WHAT  ARE   FUNDS? 


CHAPTER  II 
MONEY    FUNDS 

EXPERIENCE  will  at  once  suggest  that  what  we  call 
"  funds  "  must  be  something  that  will  be  accepted  bj  others 
in  exchange  for  their  goods  or  services — i.  e.,  something 
that  others  regard  as  valuable  to  them  in  their  own  business 
transactions.  Those  things  which  will  serve  as  "funds" 
to  one,  must  have  such  qualities  that  they  will  serve  as 
"funds"  to  others.  By  way  of  illustration  let  us  suppose 
that  a  blacksmith  in  Springfield  wishes  to  enlarge  his  busi- 
ness. To  that  end  he  begins  to  accumulate  a  store  of  horse- 
shoe nails.  Each  week  he  lays  by  twelve  pounds  of  nails, 
until  at  last  he  has  a  ton  of  them.  This  might  serve  as 
"funds"  in  a  community  where  every  one  desires  horseshoe 
nails,  but  in  Springfield  not  one  in  a  thousand  can  make 
use  of  them.  With  this  stock  in  hand  he  is  not  able  to  buy 
bricks,  lime,  or  machinery,  or  pay  for  labor.  Horseshoe 
nails  are  not "  funds  "  in  Springfield.  The  blacksmith,  how- 
ever, finds  a  man  who  can  make  use  of  a  ton  of  nails;  he 
exchanges  them  for  ten  double  eagles  of  gold.  He  has  sold 
his  nails  for  no  other  purpose  than  to  obtain  something  that 
will  serve  as  funds.  With  $200  in  gold  he  may  purchase 
the  materials  and  equipment  desired.  He  has  "funded" 
his  enterprise. 

The  whole  system  of  finance  grows  out  of  the  economy 
of  exchange.  Where  commerce  exists  as  a  feature  of  busi- 
ness enterprise,  where  each  member  of  a  community  strives 
to  do  that  for  which  he  is  best  fitted,  and  where  each  relies 

11 


12  WHAT  ARE  FUNDS! 

on  exchange  of  things  produced  for  other  things  desired,  it 
is  to  the  advantage  of  each  to  provide  himself  with  "  funds" 
with  which  purchases  and  payments  may  be  made.  A 
"fund"  is  a  collection,  or  store,  or  amount  of  something 
by  means  of  which  purchases  and  payments  may  be  made. 
The  word  "  funds  "  signifies  any  and  all  things  which  may 
be  accumulated  and  which  may  be  currently  used  in  a  com- 
munity in  exchange  for  goods  or  properties  of  others.  As 
has  been  suggested  before,  the  consent  of  both 
Parties  *8  necessary  to  an  exchange.  That  which 
will  serve  as  funds  must  have  qualities  which 
will  induce  others  to  give  their  consent  to  part  with  the 
things  which  they  own,  in  exchange.  Funds  that  are  col- 
lected or  stored  up  to  pay  living  expenses,  or  for  the  pur- 
chase of  comforts  and  enjoyment,  may  be  called  "  main- 
tenance funds."  They  answer  the  same  purpose  for  an 
individual  that  a  fund  would  when  laid  by  for  the  "main- 
tenance" of  a  manufacturing  plant.  Funds  that  are  col- 
lected or  provided  for  business  equipment  are  called  "capital 
funds."  The  capital  of  a  business  concern  is  made  up  of 
funds  contributed  to  it  for  permanent  use.  A  money  or  a 
credit  reserve  laid  by  for  the  payment  (sinking)  of  a  debt 
is  called  a  "sinking  fund."  When  money  is  stored  up 
for  the  purpose  of  hiding  it  away,  and  not  for  use,  it  is 
called  a  "  safe  deposit "  or  a  "  hoard."  This,  however,  does 
not  properly  come  within  the  field  of  finance.  To  "  fund  " 
an  enterprise  is  to  provide  the  means  whereby  such  pur- 
chases and  payments  may  be  made  as  are  necessary  to  its 
success.  One  whose  business  it  is  to  provide  funds  for 
business  enterprise  is  called  a  "  capitalist " ;  the  manager  of 
funds  is  a  "  financier  "  ;  he  who  hoards  money  is  a  "  miser." 
A  "  funded  debt "  is  one  for  the  payment  of  which  some 
definite  and  adequate  provision  is  made  for  funds  when 
due.  To  illustrate :  A  borrows  $1,000  from  B.  A  thereby 
procures  "  funds "  for  his  enterprise ;  he  funds  his  under- 
taking; he  secures  a,  working  capital  of  $1,000.  The 


MONEY  FUNDS  13 

instrument  employed  to  this  end  is  a  contract  for  the  future 
delivery  of  money  which  he  sells  to  B  for  the  funds  desired. 
But  before  B  delivers  the  $1,000  to  A  in  exchange  for  the 
note,  he  demands  that  some  definite  provision  be  made  for 
its  payment.  Complying  with  this  demand,  A  executes  a 
mortgage  on  his  farm  as  "  security  "  for  the  payment  of  the 
note.  The  mortgage  is  a  conditional  deed  to  his  land,  the 
condition  being  that  in  case  A  fails  to  pay  the  note  when 
due,  B  may  sell  the  farm,  and  out  of  the  "funds"  thereby 
obtained  retain  enough  to  pay  the  note.  In  other  words, 
A  sets  aside  property  in  trust,  the  sale  of  which  will  create 
a  fund  sufficient  to  pay  his  debt. 

Funds  may  be  divided  into  two  classes:  (1)  Those 
things  which  pass  in  the  community  as  money ;  (2)  forms 
of  credit,  or  contracts  for  the  future  delivery 
°f  money.  These  may  be  given  and  accepted 
for  the  purpose  of  making  purchases  and  pay- 
ments. Both  of  these  forms  are  a  part  of  a  money  economy. 
Under  a  system  in  which  credit  is  used  as  a  means  of  pur- 
chase, the  necessity  for  actual  delivery  of  money  is  in  large 
measure  avoided.  Instead  of  "  money  funds  "  being  kept 
on  hand  by  each  member  of  the  business  community,  a  few 
individuals  or  institutions  hold  a  large  store  of  money  "  in 
reserve,"  and  the  business  community  makes  its  arrange- 
ments with  them  for  forms  of  credit  which  will  serve  their 
financial  needs  more  readily  than  money  itself.  The  money 
demands  and  money  uses  are  largely  demands  for  and  uses 
of  money  for  settlement  of  credit  balances.  In  all  modern 
systems  of  finance,  by  far  the  greater  part  of  business  enter- 
prise is  "  funded ''  by  means  of  credit.  The  manner  in 
which  this  is  done  will  appear  later. 

MONEY  FUNDS 

Two  qualities  or  characteristics  are  essential  to  money. 
In  the  first  place,  those  things  which  are  used  as  money 
within  a  given  community  must  exist  in  such  quantities  as 


14  WHAT  ARE  FUNDS! 

to  allow  the  various  members  of  the  community  to  collect 
them  into  "funds  "  large  enough  to  make  the  purchases  and 

payments  necessary  for  their  business  under- 
./isaemtai  7  i  •  *  -i  ±\  a. 
characters-  takings.  A  people  can  not  use  as  money  that 

tics  of  money.  ^{Q^  they  do  not  possess;  the  thing  employed 
must  exist  in  such  quantities  that  it  may  be  had  when 
needed.  In  the  second  place,  the  money  commodity  must 
be  so  highly  valued  by  all  that  it  will  readily  be  taken  in 
exchange  for  goods  offered  for  sale.  No  two  persons  may 
place  the  same  estimate  of  value  upon  it ;  judgments  of 
value  of  the  money  commodity  may  differ  as  widely  as  its 
various  uses,  but  value  it  must  have  in  the  judgment  of  all 
with  whom  exchanges  are  to  be  made.  Otherwise  a  busi- 
ness man  could  not  get  together,  or  offer,  enough  of  the 
commodity  to  cause  another  to  think  that  he  would  profit 
by  an  exchange. 

CONDITIONS  ON  WHICH  THE   FUND  ABILITY  AND  VALUE  OF 

MONEY  DEPEND 

To  this  end  the  things  accumulated  for  use  as  money 
must  admit  of  being  divided  with  such  accuracy  as  to  en- 
able one  readily  to  calculate  the  amount  or  por- 
}'und"must  tion  on  wm'°h  his  judgment  of  value  is  to  be 
admit  of  di-  based.  If,  for  example,  some  one  offers  a 
unit?.iHtt  horse  for  $100>  it;  must  be  known  at  once  just 
how  much  gold  is  intended  before  one  can 
form  a  judgment  as  to  whether  he  would  prefer  the  gold  or 
the  horse.  The  money  offered  must  admit  of  division  into 
comparatively  uniform  units.  In  a  pastoral  community 
sheep  may  be  used  as  money;  a  flock  of  sheep  may  be 
divided  into  units.  One  hundred  sheep  or  fifty  sheep  have 
a  very  definite  meaning.  There  is  uniformity  enough 
about  the  primitive  sheep  to  satisfy  the  judgment  of  the 
primitive  man.  Then,  instead  of  judging  the  comparative 
values  of  a  goat,  an  ox,  a  horse,  and  a  stack  of  fodder  in 
terms  of  dollars  as  we  do  now,  the  party  having  all  of  these 


MONEY  FUNDS  15 

things  for  sale  might  offer  the  goat  for  5  sheep,  the  ox  for 
10  sheep,  the  horse  for  20  sheep,  and  the  stack  of  fodder 
for  15  sheep.  Each  member  of  the  community  having 
sheep  would  then  have  to  consider  whether  5  sheep  would 
be  of  greater  value  to  him  for  purposes  of  trade  or  for 
other  use  than  the  goat;  whether  10  sheep  would  be  more 
useful  than  the  ox,  etc.,  and  on  the  result  of  his  judgment, 
in  the  bickerings  among  those  making  estimates  and  offers, 
would  depend  the  agreement  as  to  price. 

Since  prices  must  be  made  and  quoted  in  terms  which 
will  be  understood  by  others,  it  becomes  necessary  to  have 
,,  some  common  standard  of  judgment  in  esti- 

f'unds  must  mates  of  value.  Without  such  a  standard  one 
in  "uM™  trader  would  not  be  able  to  make  himself  un- 
derstood by  another.  If  I  were  to  ask  you  the 
value  of  a  certain  piece  of  land,  you  would  not  be  able  to 
express  your  thought  or  conclusion  in  answer  to  the  ques- 
tion unless  you  could  appeal  to  some  standard  or  measure 
of  value  which  was  known  to  me.  The  same  is  true  in 
making  a  trade.  In  this  case  the  one  offering  goods  for 
sale  does  not  volunteer  his  estimate  of  value,  but  by  offer- 
ing the  goods  for  a  definite  sum  of  money  both  parties  find 
in  the  price  a  common  standard  for  judgment.  Unless, 
however,  the  money  funds  in  which  the  offer  is  made  are 
uniform  in  quality  there  can  be  no  judgment  as  to  the  rela- 
tive value  of  the  thing  offered  and  of  the  price  to  be 
received.  In  other  words,  as  between  the  various  units 
which  go  to  make  up  the  money  fund,  the  judgment  of 
value  must  be  practically  the  same.  Without  uniformity, 
such  expressions  as  a  dollar,  a  sheep,  a  bushel  of  wheat,  or 
whatever  the  thing  used  as  money,  would  have  no  uniform 
meaning. 

The  thing  used  must  likewise  have  such  durability  as  to 
protect  it  from  immediate  decay.  There  must  be  no  fear 
of  loss  or  damage  while  the  thing  used  is  held  in  the  form 
of  funds.  Lack  of  durability  would  render  uncertain  al\ 


16  WHAT  ARE  FUNDS! 

judgments  of  value  for  future  use.    It  would  make  exchange 
itself  so  far  a  subject  of  chance  as  to  render 
funds  "must     impossible  all  estimates  of  an  advantage  to  be 
have  dura-      "gained"  from  a  business  transaction.     When 
calculation  of  value  for  future  use  is  made  diffi- 
cult, exchange  as  a  regular  part  of  the  industrial  system  is 
hampered. 

Money  funds  must  be  adapted  to  being  carried  about  or 
passed  from  one  person  to  another  without  great  inconve- 
nience.     Nothing  can  serve  as  money  unless 
\\indTmust     tne  ^unc*  accumulated  can  be  easily  handled. 
admit  of         Lands,  houses,  and  country  estates  can  not  be 

babout  Carried  used  on  tLis  account-  There  are  other  quali- 
ties  which  may  add  to  the  value  of  a  thing  to 
be  used  as  money,  but  the  foregoing  may  be  said  to  be 
necessary  to  adapt  it  to  the  purposes  of  exchange.  Each 
and  all  of  these  qualities  must  be  possessed  to  some  extent. 
Some  things  are  more  easily  carried  about  than  others ; 
some  are  more  durable  than  others,  while  some  may  be  more 
uniform  or  more  easily  divisible,  but  no  one  of  these  charac- 
teristics must  be  wholly  wanting  in  the  thing  used  as 
money.  The  greater  the  degree  in  which  all  are  present, 
the  more  serviceable  will  be  the  substance  employed. 

THINGS  THAT  HAVE  BEEN  USED  AS  MONEY 
In  a  given  community  those  things  will  be  used  for 
money  that  will  give  greatest  ease  to  exchange.  Among 
one  people,  each  family  may  grow  a  little  corn,  may  have 
a  few  horses  or  cattle,  may  possess  various  rude  weapons 
or  utensils  for  domestic  use,  may  also  have  provided  for 
Skins  themselves  shelter.  They,  however,  are  a 

hunting  people ;  meat  is  perishable ;  for  long 
periods  they  may  be  entirely  without  corn.  At  times 
horses  may  be  had,  but  they  are  not  obtainable  by  all ; 
weapons  are  in  great  variety  and  size,  and  adapted  to  the 
strength  and  skill  of  those  using  them.  The  tribe  is  migra- 


MONEY  FUNDS  17 

tory  and  often  changes  its  location.  Among  such  a  people 
the  things  best  adapted  to  serve  as  money  may  be  the  skins 
of  animals. 

Another  people  may  live  under  quite  similar  conditions, 

except  that  they  get  a  large  part  of  their  substance  from 

fishing.     The  things  that  best  lend  themselves 

to  their  use  as  money  are  dried  and  smoked  fish 

or  clams.     These  will  last  for  years,  and  there  is  always  a 

demand  for  them  as  food.     When  fish  are  scarce  the  dried 

products  will  be  more  highly  valued  ;  when  plentiful,  they 

will  be  prized  less ;  but  at  all  times  they  will  have  some 

value  due  to  their  usefulness  and  to  the  labor  entailed  in 

procuring  more. 

Under  other  circumstances  a  people  may  develop  a  pas- 
toral life.  With  them  their  flocks  and  herds  furnish  that 

which  serves  them  best  as  money.  Many  of 
Livestock.  J  J 

our  financial  terms  have  come  from  such  a  prac- 
tice :  pecus  was  the  Latin  name  for  kine — cattle ;  pecunia 
came  to  be  the  Latin  word  for  money ;  we  have  from  this 
such  words  as  pecuniary,  pecunious,  impecunious,  pecula- 
tion, etc.  They  counted  their  money  (cattle)  by  the  head 
(per  capita),  and  their  kine  were  their  coital.  Our  money 
is  our  capital ;  our  goods  are  our  chattels  ;  our  kine  are  our 
cattle.  In  old  England  scot  was  a  tax  or  fee ;  this  presu- 
mably came  f  rom  the  Saxon  scot,  meaning  cattle,  and  "  scot " 
was  used  when  taxes  were  paid  in  kind.  Our  expression, 
to  go  "  scot  free,"  comes  directly  from  this  use  of  the  word 
— that  is,  free  from  taxes  or  fine. 

In  communities  where  agriculture  prevailed,  some  forms 
of  agricultural  products  were  found  to  be  most  serviceable 

in  making  exchange;  wheat,  oats,  and  barley 
Agricultural  j  •  -n  £  •  • 

products.         were  used  in  Europe  for  centuries;  maize  was 

employed  among  the  Indians  of  Central  Amer- 
ica; where  olive-oil,  cakes  of  dried  fruit,  cocoanuts,  and  tea 
have  been  largely  produced  they  have  served  peoples  as  a 
means  of  exchange. 


18  WHAT  ARE  FUNDS? 

Both  the  advantages  and  disadvantages  of  the  use  of 
these  primitive  forms  of  money  are  apparent.     By  their 

use  many  of  the  economics  of  exchange  were 
and  disad-  secured  and  many  of  the  difficulties  of  barter 
vantages  in  were  overcome ;  but  still  commerce  could  not 
thesejorms  be  carried  on  with  ease.  All  of  the  things  used 
of  money.  possessed  the  qualities  essential  to  money,  but 
none  possessed  them  in  high  degree.  All  had  qualities 
which  caused  them  to  be  valued,  but  judgments  of  value 
varied  widely  with  each  individual.  All  admitted  of  divi- 
sion, but  division,  in  most  cases,  could  not  be  made  with 
exactness.  There  was  little  uniformity,  therefore  judgment 
was  hampered  as  to  the  value  of  a  unit  of  kind.  Their 
durability  was  not  great.  Many  of  them  could  not  easily 
be  passed  about  from  hand  to  hand.  Yet,  with  all  these 
faults  and  disadvantages,  they  were  the  best  that  the  people 
using  them  could  provide ;  it  required  centuries  of  social 
and  industrial  progress  for  these  peoples  to  acquire  those 
things  which  would  serve  them  better. 

Every  increased  facility  given  to  exchange  gives  a  wider 
range  to  social,  political,  and  industrial  activity.     With  the 

growth  of  intelligence,  with  the  higher  devel- 
metuls.  opment  of  industrial  processes  and  artistic  skill, 

metals  were  brought  into  use  which  possessed 
qualities  better  adapted  to  serve  as  funds.  Copper,  tin, 
iron,  zinc,  brass,  and  other  alloys,  came  to  have  currency. 
Even  when  these  were  comparatively  scarce,  they  were  to 
be  had  in  such  quantities  as  to  allow  the  accumulation  of 
"funds"  sufficient  to  serve  the  community  in  exchange, 
and  were  so  far  superior  to  agricultural  products  that  the 
latter  became  supplanted.  Iron  was  at  one  time  used ; 
but  when  iron  came  to  be  so  plentiful  that  it  was  used 
for  weapons,  household  implements,  plowshares,  etc.,  the 
estimate  placed  on  the  value  of  iron,  as  compared  with 
other  things,  was  so  small  that  one  could  not  easily  accu- 
mulate and  carry  about  a  fund  large  enough  to  make 


MONEY  FUNDS  19 

the  necessary  purchases  of  the  goods.    Thus,  with  increased 
use  of  iron  for  other  purposes,  it  became  unfit  for  use  as 


money,  because  of  the  great  amount  necessary  to  an  ex- 
change— i.  e.,  it  lacked  so  far  the  element  of  convenience 


£0  WHAT  ARE  FUNDS  * 

that  other  metals  were  preferred.  In  time,  the  same  came 
to  be  true  of  tin,  zinc,  and  to  a  large  extent  of  copper, 
brass,  nickel,  and  other  metals.  A  good  illustration  of 'the 
inconvenience  attending  the  use  of  copper  is  furnished  in 
the  cut  on  page  19.  The  copper  sheet  from  which  the 
engraving  was  made  is  14  inches  long,  9  inches  wide,  and 
weighs  7  pounds.  It  bears  the  stamp  of  a  Swedish  sovereign. 
It  may  be  called  a  Swedish  four-dollar-bill  of  1744.  Imagine 
taking  a  few  of  these  to  market  to  do  a  little  shopping ! 

Strange  as  it  may  seem,  the  world's  best  moneys  have 

come  from  materials  used  for  ornament.     This,  however, 

follows  naturally.     The  desire  for  ornamenta- 

Ornaments.  J  .  f         n     . 

tion  is  general.     It  arises  out  01  a  desire  for 

distinction  among  one's  fellows.  Those  things  that  are 
used  for  decorative  purposes  are  things  not  common. 
Things  that  will  serve  a  particular  people  for  ornament 
will  be  desired  by  all — that  is,  they  possess  qualities  which 
will  cause  them  to  be  highly  valued.  In  both  money  and 
ornament  the  element  of  value  brings  them  into  close  rela- 
tion. If  the  things  desired  for  decoration  possess  the  other 
qualities  essential  to  money,  the  two  uses  may  be  concur- 
rent. Fishermen  have  polished  the  vertebrae  of  fish  and 
used  them  for  beads  ;  the  American  Indian  has  polished  the 
ends  of  black  and  white  shells  and  strung  them ;  wampnm- 
peag  (sometimes  called  wampum,  or  peag)  was  used  for 
money  by  the  Indians.  In  Massachusetts,  when  the  money 
which  the  English  people  were  used  to  became  too  scarce 
to  serve  them  in  their  exchanges,  they  reverted  to  the  use 
of  the  Indian  wampum ;  the  general  court  of  that  colony 
made  this  legal-tender  currency  among  the  settlers  at  a  fixed 
rate  to  the  amount  of  40  shillings.  Ornaments  of  various 
kinds  have  been  used  for  money.  Many  of  them  have 
great  durability ;  they  accumulate  from  one  generation  to 
another  until  they  are  possessed  by  members  of  the  tribe 
in  quantities  sufficient  to  answer  the  purposes  of  money. 
When  these  things  serve  exchange  better  than  the  less 


MONEY  FUNDS  21 

durable  products,  they  often  coine  to  be  the  only  money 
used. 

Gold  and  silver  were  first  used  for  ornament  alone.  For 
many  centuries  they  were  too  scarce  to  serve  as  money — to 
be  accumulated  as  money  funds.  This  is  still 
true  amon£  some  peoples.  These  metals  finally 
came  to  be  the  generally  accepted  money  in 
civilized  nations.  Under  modern  industrial  conditions  these 
metals  are  in  every  way  better  adapted  to  money  uses  than 
other  materials  are.  They  are  universally  prized  ;  they  ad- 
mit of  accurate  division,  and  units  of  value  may  be  exactly 
determined  ;  they  are  easily  refined,  and  may  be  given  exact 
uniformity  of  quality ;  they  have  great  durability,  do  not 
easily  corrode  ;  they  exist  in  quantities  sufficient  for  cur- 
rency, but  are  not  so  plentiful  that  it  is  necessary  for  a 
trader  to  encumber  himself  in  his  effort  to  have  on  hand 
a  store  large  enough  to  effect  exchange;  funds  of  gold 
and  silver  being  highly  valued  may  be  easily  passed  from 
hand  to  hand.  For  these  reasons  they  are  more  useful  as 
money  in  civilized  communities  than  the  "  baser  metals." 
They  also  serve  better  than  the  other  "  precious "  metals ; 
better  than  platinum,  because  platinum  is  too  scarce ;  dia- 
monds and  precious  stones  are  easily  broken  and  destroyed, 
are  not  divisible  into  equal  parts,  are  not  uniform  in  qual- 
ity. Gold  and  silver  not  only  possess  the  qualities  essential 
to  money  in  a  high  degree  of  perfection,  but  also  admit  of 
stamps  and  other  marks  of  authority  which  give  certainty 
as  to  weight  and  fineness.  Coins  made  of  these  metals  are 
easily  distinguished  from  counterfeits;  they  have  charac- 
teristics which  permit  traders  most  easily  to  arrive  at  a  con- 
clusion as  to  value  and  to  agree  on  a  price. 

With  all  primitive  people  several  commodities  are  in- 
discriminately used  as  money.  Such  a  money  system  mul- 
tiplies the  difficulties  of  exchange.  If  skins  be  used,  then 
an  ox  may,  by  one  man,  be  estimated  as  having  a  value 
equal  to  10  bearskins ;  another  may  compare  the  value  of 


22  WHAT  ARE  FUNDS? 

the  ox  to  20  raccoon  skins ;  a  third  may  use  the  fur  of  the 
mink  as  his  basis  of  comparison ;  a  fourth,  having  an  as- 
sortment of  skins,  might  offer  2  bearskins,  6  raccoon  skins, 

10  mink  skins,  and  15  skunk  skins.  With  such 
The  develop- 
ment of  a  a  money  it  is  difficult  to  come  to  a  conclusion 
standard.  jn  trade.  Commercial  transactions  become  in- 
volved ;  the  bickering  necessary  to  a  sale  is  a  long  process. 
Exchange  with  such  a  money  would  be  little  better  than 
barter.  Metallic  money  may  quite  as  much  encumber  a 
transaction.  Before  the  development  of  a  system  of  exact 
coinage  the  money  metals  often  had  stamped  upon  them 
marks  of  private  houses  or  of  government  which  guaranteed 
their  fineness.  They  were  then  clipped  up  or  cut  into  pieces 
to  serve  the  purposes  of  the  transaction  in  which  they  were 
used.  The  illustration  on  the  next  page  is  a  copy,  slightly 
reduced,  of  a  Japanese  sheet  of  silver  bearing  such  marks 
of  guarantee ;  in  whatever  way  it  might  be  cut,  each  piece 
would  still  carry  with  it  a  stamp.  After  a  system  of  ex- 
act coinage  was  introduced,  the  problem  of  the  different 
values  placed  upon  each  metal  had  still  to  be  solved.  A  gold 
coin  and  a  silver  coin  might  each  bear  the  stamp  of  "one 
pound  sterling,"  yet  each  would  pass  at  a  different  valuation. 
Each  metal  added  to  the  currency  increased  the  confusion. 
Attempts  have  been  made  to  avoid  this  trouble  by  using 
a  fixed  legal  ratio  between  coins  of  different  materials. 
Such  devices,  however,  have  often  proved  futile,  for  traders 
were  constantly  passing  judgment  on  the  comparative  values 
of  the  coins  used,  and  when  the  values  of  these  did  not 
correspond  with  the  ratios  intended,  each  stipulated  the 
metal  he  would  receive  in  exchange.  After  many  failures, 
an  expedient  was  hit  upon  which  allowed  several  kinds  of 
money  to  be  used  at  the  same  time  and  all  of  the  estimates 
of  value  to  be  compared  with  one  metal.  This  was  done 
by  what  is  known  as  "  the  establishment  of  a  standard."  In 
a  complex  system  of  money,  the  standard  is  a  coin  composed 
of  a  certain  amount  of  metal  of  a  particular  kind,  having 


MONEY  FUNDS 


23 


prescribed  weight  and  fineness,  for  which  all  other  coins 
may  be  exchanged  at  a  fixed  ratio.     The  weight  and  fine- 


24  WHAT  ARE  FUNDS? 

ness  of  the  other  coins  are  also  prescribed,  but  it  is  by  a 
process  known  as  redemption  that  their  relative  values  and 
ratios  of  exchange  are  maintained.  It  is  this  device  that 
lies  at  the  foundation  of  modern  graduated  systems  of 
money. 

As  before  observed,  the  evolution  of  the  modern  money 
system  is  a  long  and  involved  process,  one  dependent  upon 

the  development  of  higher  intelligence,  broader 
rfhse((,^cimal  association,  and  improved  methods  of  social, 

political,  and  industrial  cooperation.  With 
modern  methods  even  barter  would  not  be  as  cumbersome 
as  money  exchange  under  more  primitive  systems.  In  fact, 
modern  facilities  for  comparison  of  wants  and  of  goods  by 
advertisement  and  other  means  of  intelligence,  allow  of 
many  things  being  exchanged  by  a  system  of  barter  in  pref- 
erence to  sale  and  purchase.  Some  newspapers  and  circular 
publications  are  devoted  to  this,  and  their  support  is  the 
best  testimonial  to  their  success.  With  all  our  improved 
processes,  however,  with  all  our  modern  adaptations,  there 
are  still  many  of  the  old  difficulties  that  persist.  A  com- 
parison of  the  complex,  lumbering  English  system  of  money 
with  our  own  will  serve  to  illustrate  the  economies  intro- 
duced by  later  experience  and  better  adaptations.  Ex- 
changes and  accounts  in  pounds  and  shillings  and  pence 
necessarily  burden  English  commerce  with  an  enormous 
expense  of  time  and  energy.  It  is  a  burden  similar  to  a  tax 
on  trade.  If  the  amount  of  time  that  is  saved  to  our 
nation  by  the  decimal  system  of  money  were  to  be  com- 
puted, the  result  would  be  startling.  Let  us  assume  that, 
by  means  of  the  decimal  system,  twenty  minutes  per  day 
were  saved  to  those  engaged  in  commercial  transactions 
and  accounts;  with  5,000,000  people  employed  in  this 
manner,  there  would  be  an  economy  of  over  $100,000,000 
per  annum.  In  the  United  States,  however,  we  are  still  en- 
cumbered by  older  systems  of  weights  and  measures.  It  is 
to  be  hoped  in  the  interest  of  economy  that  a  decimal  system 


MONEY  FUNDS  25 

may  ultimately  be  adopted  for  these  calculations.  Another 
economy  in  exchange  that  has  been  worked  out  by  Americans 
comes  through  our  broader  social,  political,  and  industrial 
organization.  Throughout  the  United  States  and  Canada  we 
have  practically  one  standard  and  one  system  of  money.  The 
business  of  this  Continent  is  freed  from  the  multiplicity  of 
computations  necessary  to  deals  in  Europe  and  other  parts 
of  the  world.  Gradually  the  world  is  working  toward  uni- 
formity in  standards  and  uniformity  in  monetary  systems. 
The  result  is  a  higher  economy — increased  facility  in  mak- 
ing commercial  judgments,  and  increased  advantage  in  com- 
mercial exchange. 

THE  MONEY  SYSTEM  OF  THE  UNITED  STATES 

The  central  idea  of  the  American  money  system  is  the 
"  dollar."     What  is  a  dollar  ?     This  question  has  been  the 

„  subject  of  volumes  of  discussion.     The  answer 
The  "dollar"         .r  ,        ,  ,       ,  .  .., 

—The central  to  the  question  has  become  involved  in  a  wilder- 

fact  in  our  ness  of  theory — lost  in  a  maze  of  abstractions — 
as  a  result  of  which  the  reader  is  led  to  believe 
that  there  is  great  difficulty  in  understanding  just  what  a 
dollar  is.  Fortunately  we  do  not  have  to  read  all  this 
literature  and  wrestle  with  all  the  hypothetical  problems 
propounded.  The  whole  matter  is  settled  by  one  section  of 
the  United  States  statutes.  The  Act  of  February  12,  1873 
(Sec.  14),  establishes  "25.8  grains  of  gold"  yVW  fine  (or 
23.22  grains  of  fine  gold),  which  bears  the  required  stamp 
and  impress.  The  statute  says  that  this  is  a  dollar — not 
that  it  resembles  a  dollar,  or  that,  for  the  purposes  of  discus- 
sion, it  may  be  considered  a  dollar,  but  that  it  is  a  dollar. 
Furthermore,  the  statute  again  cuts  off  all  controversy 
regarding  the  worth  of  a  dollar ;  for  it  says  that  the  dol- 
lar (the  printed  piece  of  gold  containing  25.8  grains  of 
gold  -j^ftftj-  fine)  "  shall  be  the  unit  of  value  "  in  our  money 
system. 


26  WHAT  ARE  FUNDS! 

But  what  about  the  other  forms  of  money  in  our  com- 
plex system  ?     In  the  first  place,  there  are  six  kinds  of  gold 

Gold  coins  of  coin' viz'' the  "do\lar>"  the  "quarter-eagle,"  the 
the  United  "three-dollar"  piece,  the  "  half -eagle,"  the 
States.  "eagle,"  and  the  "double-eagle."  What  about 

these  ?  They  must  contain  exactly  the  proportions  of  1,  2£, 
3,  5, 10,  and  20  in  weight  of  gold  of  uniform  fineness  (TVVV)- 
The  statute  does  not  provide  how  much  the  several  pieces 
enumerated  shall  be  worth.  But  the  weight  and  fineness  of 
metal  being  established  for  each,  they  pass  in  the  com- 
munity and  are  "valued"  by  business  men  at  $2.50,  $3,  $5, 
$10,  or  $20,  as  the  case  may  be.  That  is,  a  piece  of  gold 
which  has  51.6  grains  of  gold  is  valued  at  just  twice  as  much 
as  a  piece  containing  25.8  grains.  If,  therefore,  the  latter  is 
one  dollar,  the  former  would  be  valued  at  $2.  They  all  pass 
"at  par"  by  virtue  of  this  exact  proportion  of  gold  having 
the  same  quality  and  fineness,  and  thus  the  "three-dollar" 
gold  piece  will  pass  interchangeably  for  three  "  one-dollar  " 
pieces. 

We  also  have  in  our  system  "silver  dollars,"  "half- 
dollars,"  "quarters,"  "dimes,"  etc.  The  statute  prescribes 
Silver  coins  .lust  ^1OW  mucn  silver  there  shall  be  in  each,  of 
of  the  United  T90°D°ir  mie>  and  what  stamp  and  impress  shall  be 
put  on  them.  The  law  does  not  attempt  to  pre- 
scribe how  much  these  coins  shall  be  worth ;  it  simply  makes 
provision  for  their  form,  weight,  and  fineness.  The  Gov- 
ernment also  holds  itself  ready  to  exchange  a  silver  "dollar" 
for  a  gold  "dollar,"  and  with  this  lets  each  man  decide  for 
himself  how  much  it  is  worth. 

Minor  coins  are  also  a  part  of  our  metallic  money 
equipment.  The  five-cent  pieces,  "  nickels,"  and  "  cents  " 
Minor  coins  &^  ^°  convenience  m  making  exchange. 
"  What  is  a  '  nickel '  ? "  or  "  What  is  a  cent  ? " 
may  be  determined  in  the  same  manner  as  "  What  is  a 
silver  dollar?"  They  are  pieces  of  metal,  of  definite 
form,  weight,  and  quality,  which  the  Government  agrees 


MONEY  FUNDS  27 

to  exchange  for  gold  coins  at  the  rate  stamped  on  their 
faces. 

Besides  the  gold,  silver,  nickel,  and  bronze  metallic 
moneys  there  are  nine  classes  of  paper  moneys  in  circula- 
Paner  tion,  each  of  which  has  a  definite  provision  for 

money  in  form  and  design.  Paper  money  is  issued  in 
circulation.  denorainations  of  $1,  $2,  $5,  $10,  $20,  and 
higher  multiples.  Each  is  in  the  nature  of  a  promise  of  the 
Government,  directly  or  indirectly,  to  deliver  the  number  of 
dollars  (gold)  for  which  it  is  issued.  The  United  States  notes 
l  United  (greenbacks)  are  promises  of  the  Government 
States  notes  to  pay  to  the  holder  a  definite  number  of  gold 
or  greenbacks.  Qr  gi]ver  doljars  «on  demand."  For  example, 
a  "two-dollar  greenback"  is  one  which  has  written  upon  it 
the  promise  of  the  United  States  to  pay  to  the  bearer  on 
demand  two  gold  or  silver  dollars.  Silver  dollars,  however, 
are  exchangeable  for  gold  whenever  gold  is  desired.  There- 
fore it  is  entirely  optional  with  the  holder  as  to  which  will 
be  received. 

A  national  bank-note  is  a  promise  of  a  national  bank  to 
pay  to  the  holder,  or  bearer,  on  presentation,  the  amount 
named  in  the  bill  in  legal-tender  money  of  the 
United  States— i.  e.,  in  gold,  silver  coins,  or 
greenbacks.  This  makes  the  bank-note  indirectly 
convertible  into  gold  at  the  option  of  the  one  owning  or 
holding  it. 

The  Government,  recognizing  the  inconvenience  of  car- 
rying about  a  large  fund  of  gold,  has  made  provision  for 
the  deposit  of  gold  funds  in  the  Treasury,  either  as  coin  or 
bullion,  in  any  amount  in  which  they  may  be 
certificates  accumulated,  against  which  an  equal  amount  of 
gold  certificates,  or  certificates  of  gold  deposit, 
is  issued.  Thus  one  holding  the  certificates  may,  "on  de- 
mand," have  the  gold  "dollars"  or  the  money  value  of 
bullion  deposited. 

The  silver  certificate  is  issued  for  a  similar  purpose. 


28  WHAT  ARE  FUNDS! 

Silver  money  is  about  sixteen  times  as  heavy  as  gold  money. 

To  carry  about  a  large  fund  of  it  becomes  impossible ;  even 

small  sums  are  very  inconvenient  to  handle.    By 

4.  Silver  allowing  a  deposit  to  be  made  and  certificates 
certificates.  &.  r.  . 

of  deposit  to  circulate  as  money  in  their  stead, 

the  public  is  served  in  every  manner  the  same  as  by  the  use 
of  the  coin.  At  the  same  time,  if  gold  is  preferred,  they 
may  be  exchanged  for  gold  when  presented  for  payment. 

Similar  privileges  were  formerly  given  to  owners  of  silver 
bullion.  Instead  of  requiring  the  owner  to  have  his  metal 
coined  before  putting  it  into  circulation,  the 
Government  allows  him  to  deposit  the  bullion  at 
the  coinage  value  and  receive  certificates  which 
entitle  him  to  withdraw  silver  coin.  Thus  the  Government 
has  the  metal  for  coinage  if  occasion  requires,  but  is  not  put 
to  the  necessity  of  coining  it.  The  certificate  is  indirectly 
exchangeable  for  gold  "dollars"  in  the  same  manner  as  "sil- 
ver certificates."  The  process  is  only  one  step  farther 
removed. 

The  holders  of  small  denominations  of  "greenbacks" 

find  that  it  takes  a  long  time  to  count  out  large  sums  with 

accuracy.     As  a  means  of  avoiding  this,  small 

bills  ma^  be  deP°sited  to  tllc  amount  of  $10,- 
000  or  multiples  thereof,  and  one  or  more  bills 
or  "  currency  certificates "  may  be  issued  to  represent  the 
amount  deposited.  Thus,  for  the  transfer  of  $1,000,000  it 
would  require  only  one  hundred  bills  of  the  lowest  denom- 
ination. These,  as  may  readily  be  seen,  are  indirectly  ex- 
changeable for  gold. 

Fractional  currency  notes  were  issued  for  small  change 
during  the  civil  war  when  gold  and  silver  were  scarce. 
7  Fractional  ^hey  were  issued  in  fractions  of  a  dollar,  and 
currency  were  derisively  called  "shin plasters."  They 
have  been  canceled  as  fast  as  presented  at 
the  Treasury,  but  there  are  still  about  $15,000,000  out- 
standing. 


MONEY   FUNDS  29 

Old  demand  notes  and  compound  interest  notes  are 
8  Old  de-  f°rms  °f  currency  similar  in  character  to  the 
mand  notes,  greenback,  except  that  the  latter  bears  com- 
9.  Compound  pound  interest  at  the  rate  stated  in  the  contract. 
interestnotes.  promiseg  of  t 


ernment  to  pay  on  demand  gold  or  silver  in  exchange. 

In  none  of  these  forms  of  money  does  the  Government 
attempt  to  say  how  much  it  is  worth.  It  simply  deter- 
The  uniform-  mine8  what  ^"dollar"  is—  i.  e.,  it  represents 
ity  of  value  that  a  dollar  is  a  coin  of  the  United  States  con- 
in  our  system.  taining  %3%%  grain8  ofjme  gold  with  one-tenth 
of  alloy  to  prevent  abrasion.  It  then  agrees  to  exchange 
all  forms  of  money,  other  than  gold,  for  coins  of  that 
metal,  and  supplies  itself  with  a  reserve  fund  of  gold  to 
this  end.  The  public  is  left  to  place  its  own  value  on  the 
gold  "  dollar"  as  well  as  on  all  other  coins  and  bills  in  the 
system.  The  process  of  redemption  operates  to  make  the 
estimates  or  valuations  of  all  kinds  of  dollars  alike.  The 
value  of  a  "  dollar  "  of  any  kind  is  therefore  the  value  of 
23.22  grains  of  pure  gold. 


CHAPTER  III 
CKEDIT    FUNDS 

CREDIT  is  a  contract  made  between  two  parties  whereby 
the  one  promises  to  deliver  a  certain  amount  of  money  to 
the  other  at  a  specified  time.  This  contract,  or  promise, 
may  be  written  or  oral,  formal  or  informal,  expressed  or 
implied,  but  in  each  case  the  essential  fact  is  the  same — a 
contract  for  the  future  delivery  of  money.  A  "credit 
transaction  "  is  one  in  which  a  promise  to  pay  (i.  e.,  a  con- 
tract for  future  delivery  of  money)  is  ex- 
Definition  of  c}iangec[  for  something  else  of  value.  When 
one  deals  "  on  credit,"  he  deals  on  his  own 
promises  to  pay,  or  contracts  for  future  delivery,  instead  of 
money  ;  when  one  buys  for  (or  on)  credit,  he  purchases 
goods  and  gives  his  obligation  to  pay  in  exchange ;  when 
one  sells  for  (or  on)  credit,  he  transfers  his  goods  to  another 
in  exchange  for  the  promises  of  that  other  to  deliver  a  defi- 
nite sum  of  money  at  a  definite  future  time. 

ILLUSTRATIONS  OF  CREDIT  USES 

Morgan  is  a  young  man  of  sober,  industrious  habits,  is 
well  trained,  and  has  a  good  reputation  in  the  community 
where  lie  lives.  He  decides  to  begin  business  for  himself. 
He  goes  among  the  farmers  with  whom  he  is  acquainted, 
and  asks  them  if  he  may  become  their  agent  for  the  sale 
of  grain  in  Chicago.  A  list  of  clients  is  scheduled  which 
seems  to  warrant  the  opening  of  an  office.  But  he  has  no 
capital,  and  it  will  require  at  least  $1,000  in  "funds"  to 
equip  and  manage  an  office  where  he  can  display  his  sam- 


CREDIT  FUNDS  31 

pies,  meet  prospective  buyers,  manage  consignments,  etc. 
He  lays  his  plan  before  his  friend  Drexel,  who  has  an 
abundance  of  means  and  who  makes  it  his  business  to  sup- 
ply funds  to  those  who  have  need  for  them  in  business. 
Morgan  explains  his  plan,  shows  his  assured  list  of  clients  and 
his  business  prospects,  and  proposes  to  Mr.  Drexel  that  if  he 
will  give  to  him  $1,000,  then  he  (Morgan)  will  execute  to 
Drexel  a  contract  in  writing  for  the  delivery  of  $1,100  one 
year  hence.  Mr.  Drexel  has  confidence  in  the  integrity  of 
young  Morgan,  and  after  studying  his  plan  of  undertaking 
and  his  prospects  of  success,  ho  decides  to  exchange  $1,000 
for  Morgan's  contract  to  deliver  $1,100  one  year  hence. 
No  money  passes,  however.  Morgan  hands  to  Drexel  his 
"note"  for  $1,100,  and  Drexel  gives  to  Morgan  his 
"  check  "  for  $1,000.  Morgan  takes  the  check  to  the  bank 
and  presents  it,  and  the  cashier  transfers  $1,000  from  the 
credit  account  of  Drexel  to  the  account  of  Morgan.  That 
is  his  capital.  This  credit  account  is  the  "fund"  with 
which  his  business  is  begun. 

Morgan  now  goes  to  Chicago,  where  he  has  the  credit 
account  transferred  to  a  bank.  He  rents  and  equips  an  office. 
He  forms  business  relations  with  an  old  and  reliable  produce 
broker  who  has  a  seat  on  the  Board  of  Trade,  and  agrees 
to  divide  commissions  with  him  until,  finally,  he  is  able  to 
purchase  a  seat  of  his  own.  He  devotes  himself  to  build- 
ing up  and  enlarging  his  clientage.  By  adver- 
tisement  and  constant  eifort  he  gains  prestige ; 
he  arranges  with  the  bank  to  carry  the  margins 
of  speculating  clients ;  he  finds  constantly  increasing  profits 
in  his  commissions.  A  business  which  at  first  netted  him 
only  enough  to  meet  office  and  personal  expenses,  after 
years  of  effort  nets  him  $10,000  per  month.  During  this 
time  he  has  paid  the  original  loan  from  Drexel,  bought 
a  seat  on  the  produce  brokers'  board  (the  Board  of  Trade), 
and  at  a  mature  age  becomes  possessed  of  many  valu- 
able properties  and  securities.  All  of  this  has  come  to 


32  WHAT  ARE  FUNDS! 

him  from  the  use  of  credit,  from  untiring  energy,  from 
thrifty  habits,  and  an  unimpeached  integrity.  He  now 
wishes  to  retire  from  the  business  of  brokerage  and  to  lead 
a  more  quiet  life,  devoting  only  such  time  to  business  affairs 
as  may  be  necessary  to  the  care  of  his  investments. 

Gates,  a  young  man  of  wealth,  and  a  friend  of  Morgan, 
desires  to  engage  in  the  business  of  brokerage.  He  does  not 
wish  to  spend  a  life  of  hard  competitive  effort  in  building  up 
a  new  business ;  he  prefers  to  buy  a  business  already  estab- 
lished. He  goes  to  Morgan  for  advice,  and  each  recogniz- 
ing an  opportunity,  a  bargain  is  made,  whereby  Gates  agrees 
to  pay  $50,000  for  Morgan's  seat  on  the  Board,  and  $250,000 
for  the  business  name  of  his  firm.  That  is,  Morgan  retains 
all  the  securities,  accounts,  and  investments  ac- 
A  credit  quired  by  him  in  course  of  business  :  he  sells  his 

purchase.  •>  ' 

seat  (his  opportunity  to  trade  on  the  Board)  and 
his  "good  will"  (or  business  reputation)  for  the  sum  of 
$300,000.  But  how  is  this  to  be  paid  for  ?  Does  Gates 
count  out  standard  gold  coins  to  that  amount  ?  No.  He 
does  not  even  pass  to  Morgan  his  check.  Finding  that  it 
will  be  advantageous  to  retain  his  present  available  "funds" 
for  use  in  the  business,  it  is  arranged  that  the  purchase  shall 
be  made  "  on  credit " ;  that  is  to  say,  Gates  offers  to  Morgan 
three  promissory  notes  for  $100,000  each,  due  in  one,  two, 
and  three  years  respectively.  The  purchase  price  of  the 
business  is  $300,000,  as  agreed,  but  in  consideration  of 
the  time  that  payment  is  deferred,  Gates  further  promises 
to  pay  5  per  cent  interest  on  the  respective  amounts  until 
they  are  paid.  By  these  several  contracts  (agreements  for 
the  purpose  of  exchange)  Gates  promises  to  deliver  $115,000 
at  the  end  of  the  first  year,  $110,000  at  the  end  of  the  sec- 
ond year,  and  $105,000  at  the  end  of  the  third  year— $330,- 
000  in  all,  principal  and  interest— instead  of  $300,000,  the 
purchase  price  if  payment  had  been  made  in  money  at 
the  time  the  business  was  delivered.  Now  note  just  what 
has  taken  place.  Morgan  has  sold  what  ?  Nothing  tangi- 


CREDIT   FUNDS  33 

ble ;  nothing  that  may  be  seen ;  nothing  that  may  be  passed 
from  hand  to  hand.  lie  has  disposed  of  his  business  oppor- 
tunity and  his  business  reputation  as  a  broker — nothing  else. 
Morgan  may  still  do  business  in  any  other  way  so  long  as 
he  does  not  attempt  to  use  his  seat  on  the  Board  or  the 
name  and  reputation  of  his  old  firm  for  the  business  of 
brokerage.  And  what  has  he  received  ?  Something  tangi- 
ble ?  Something  that  may  be  seen  ?  Something  that  may 
be  passed  from  hand  to  hand  ?  Yes,  but  what  is  it?  Is  it 
gold?  Is  it  money?  No.  What  is  it?  "Paper?  One 
slip  reads  as  follows : 

$100,000.00.  NEW  YOKK,  January  1,  1901. 

One  year  after  date,  for  value  received,  I  promise  to  pay  to  Morgan 
or  order  One  Hundred  Thousand  Dollars  in  gold  coin  of  the  United 
States,  of  present  weight  and  fineness.  With  interest  at  the  rate  of  5 
per  cent  per  annum  from  date  until  paid. 

[Signed]  GATES. 

The  other  two  slips  read  exactly  the  same  way,  except  as 
to  date  of  payment.  But  suppose  Morgan  loses  these 
slips  of  paper,  or  that  they  are  destroyed  by  fire,  is  the 
credit  destroyed  ?  Not  at  all.  The  obligation  to  pay  re- 
mains as  before ;  if  Morgan  can  prove  the  loss  and  likewise 
the  amount  due,  he  can  enforce  the  payment.  These  slips  of 
paper  are  only  evidence  of  the  credit  agreement,  which  in 
itself  is  a  thing  as  intangible  and  as  invisible  as  that  for 
which  it  was  given — viz.,  business  opportunity  and  business 
reputation.  Still,  credit  is  bought  and  sold  in  the  market ; 
in  fact,  credit  is  one  of  the  chief  items  of  exchange  in  mer- 
cantile business. 

ESSENTIAL  CHARACTERISTICS  OF  CREDIT 

Good-will,  membership  in  a  society  of  brokers,  business 

opportunity  and  reputation  are  the  properties  that  have 

changed  hands.     They  have  not  been  given  away.     None 

of  them  has  been  exchanged  for  another — they  have  not 


34  WHAT  ARE  FUNDS! 

been  bartered,  yet  no  money  has  passed.  They  have  been 
bought  and  sold,  full  payment  has  been  given  and  received, 
Credit  an(*  tne  ^u^  ^^e  nas  passed.  What  represents 

arises  out  of  the  other  side  of  the  transaction  ?  As  a  result 
exchange.  of  foe  exchange  there  came  into  being,  and  still 
exist,  Gates's  notes  for  $330,000.  All  these  promises  have 
purchasing  power,  and  so  long  as  they  exist  they  may  serve 
again  and  again  in  any  number  of  transactions  until  paid, 
or  until  their  values  are  lost  by  depreciation. 

To  understand  the  nature  of  credit  it  may  be  well  to  re- 
flect on  the  underlying  principles  of  exchange.  In  the  first 
place,  why  did  Morgan  and  Gates  trade  ?  Morgan  had  a 
business  that  was  bringing  him  in  a  net  profit  of  $10,000 
per  month — $120,000  per  year.  This  was  its  net  income- 
producing  power  to  him.  Much  of  the  return  was  due  to 
continued  personal  effort,  but  the  reputation  of  the  firm  was 
so  well  established  that  its  clientage  in  large  measure  would 
be  retained,  though  its  management  were  changed.  Mor- 
gan, however,  wished  to  avoid  the  nervous 
principles  strain  and  the  responsibilities  of  an  active 
of  exchange  broker.  In  his  judgment  he  would  rather  have 
To  crPePditd  $300,000  in  gold  than  the  business  which  he  has 
sold — i.  e.,  he  estimated  or  valued  $300,000  more 
highly  than  the  business.  Gates,  on  the  other  hand,  would 
rather  have  the  business  than  $300,000  in  gold ;  each  found 
the  transaction  to  his  advantage  and  $300,000  was  agreed 
upon  as  the  price.  Here  was  a  difference  as  to  valuation  but 
an  agreement  as  to  price,  and  the  exchange  took  place  as  a 
result. 

Now  after  the  price  has  been  agreed  upon  there  follows 
another  transaction.  Instead  of  Gates  delivering  the  $300,- 
000  in  gold  first  agreed  upon  as  the  price,  he  offers  to  Morgan 
his  three  notes,  each  for  $100,000,  with  interest— obliga- 
tions for  the  future  delivery  of  money,  amounting  in  all  to 
$330,000  when  due.  Morgan  accepts  these  in  lieu  of  the 
$300,000  in  gold.  Why  does  Gates  offer  the  notes,  and 


CREDIT  FUNDS  35 

why  does  Morgan  accept  them  ?  Gates  offers  them  because 
he  values  $300,000  in  gold  more  highly  than  the  notes. 
Morgan  accepts  the  notes  because  in  his  judgment  they  are 
Value  quite  as  valuable  as  $300,000  in  gold.  Morgan 

and  price  indorses  the  notes  and  sells  them  for  $305,000. 
of  credit.  Wjlv  does  tlie  purciiaser  offerj  and  Morgan  ac- 
cept, that  amount  ?  Manifestly,  because  the  purchaser  thinks 
the  notes  of  greater  value  to  himself  than  $305,000,  while 
Morgan  esteems  the  $305,000  more  highly.  The  purchaser 
of  the  notes  is  an  investor  in  commercial  paper;  he  gets 
his  income  from  furnishing  current  funds  to  those  who 
wish  to  sell  credit  on  terms  of  advantage  to  him.  Morgan 
is  also  about  to  devote  his  energies  to  investment,  but  his 
judgment  is  that  he  will  profit  something  by  exchanging  the 
notes  for  $305,000  in  gold.  But  again,  the  purchaser  of  the 
notes,  instead  of  paying  Morgan  $305,000  in  gold,  hands  to 
him  his  check  for  that  amount,  which  is  accepted.  It  is  quite 
clear  that  this  was  done  because  the  one  making  the  pur- 
chase thought  it  to  his  advantage,  while  Morgan  valued 
the  check  quite  as  highly  for  the  purpose  of  exchange  as 
he  did  the  gold. 

We  now  pass  to  the  consideration  of  the  basis  of  credit — 
i.  e.,  the  elements  in  it  which  cause  credit  funds  to  be  val- 
Basis  of  the  ue(^  more  highly  than  money  and  consequently 
credit  to  supplant  money  exchange.  Morgan's  judg- 

judgment.  ment  js  t]iat  ti,e  promise  of  Gates  to  pay 
$300,000  with  interest  at  5  per  cent  is  more  desirable  tban 
his  own  business  as  a  broker.  But  why  ?  Before  an  ex- 
change can  take  place  the  conclusion  must  be  reached  ;  but 
1  Ab'l'it  by  what  process  ?  The  thing  to  be  considered  is 
obtain  money  &  contract  for  future  delivery  of  money.  The 
for  future  promise  is  that  Gates  will  pay  $330,000  in  gold 
Hivery.  a£  ft  Definitely  appointed  time.  In  estimating 
the  value  of  such  promises,  what  element  must  be  taken  into 
account?  In  the  first  place,  Morgan  must  estimate  the  ability 
of  Gates  to  obtain  that  amount  of  gold  at  the  time  proposed. 


86  WHAT  ABE  FUNDS? 

He  sells  his  business ;  he  receives  a  claim  against  the  future 
income  of  Gates ;  he  must,  in  estimating  the  ability  of  Gates, 
therefore,  consider  his  facilities  for  obtaining  money.  But 
this  is  not  all.  There  is  a  second  consideration.  Morgan 
must  not  only  pass  judgment  on  Gates's  ability, 

?n*f  "3"eSS  kut  *ie  must  a^80  ta^e  *nto  account  Gates's  dispo- 
sition to  apply  the  money  obtained  to  the  fulfil- 
ment of  his  promise — to  the  payment  of  the  claim  when  due. 
These  two  judgments  lie  at  the  basis  of  all  credit ;  on  these 
two  elements  does  the  value  of  credit  rest.  (1)  A  judgment 
that  the  one  promising  is  able  to  fulfil  his  promise.  (2)  A 
judgment  that  he  will  be  willing.  Willingness  is  another 
name  for  "  honesty  "  or  "  integrity."  If  these  two  judgments 
are  favorable,  or,  as  the  business  man  would  put 
a  favorable  ^  ^  Morgan  has  "  confidence  "  in  the  future 

judgment—  delivery,  he  is  in  a  position  to  make  a  business 
Confidence.  ,  T  ,.  /.  , 

estimate  as  to  the  present  value  of  a  juture 

income  of  $330,000.  Confidence  is  nothing  more  or  less 
than  the  result  of  judgment  that  a  person  is  both  able  and 
willing  to  do  what  he  promises. 

That  which  we  call  security  is  a  contract  whereby  a  fa- 
vorable judgment  is  secured  when  otherwise  such  judg- 
ment would  be  lacking.  In  the  transaction  in 
which  Morgan  sells  Gates's  notes,  the  purchaser 
of  the  notes  was  not  well  acquainted  with  Gates,  and  was  not 
in  a  position  to  pass  favorable  judgment ;  he  did  not  value 
Gfates's  ability  and  integrity  as  highly  as  did  Morgan.  The 
purchaser  of  the  notes,  perhaps,  would  not  offer  more  than 
$250,000  for  them,  but  he  knew  Morgan  and  had  confidence 
that  he  would  meet  his  credit  obligations.  He  was  willing 
to  buy  Morgan's  contract  for  future  delivery  of  $330,000,  at 
the  times  specified  in  the  notes  from  Gates  to  Morgan,  for 
$305,000.  He  therefore  proposes  that  he  will  pay  $305,000 
for  the  notes,  on  condition  that  they  be  indorsed  by  Mor- 
gan. What  was  the  force  of  this  indorsement  ?  Why  did 
the  simple  fact  of  Morgan's  name  written  across  the  backs 


CREDIT  FUNDS  37 

of  the  notes  raise  the  purchaser's  valuation  to  such  an  ex- 
tent that  he  was  willing  to  add  $55,000  to  his  offer  ?  By 
operation  of  commercial  usage  (law)  the  addition  of  Mor- 
gan's name  set  up  a  new  contract.  If  this  contract  had 
been  written  out  in  full  it  would  have  been  as  follows : 

In  case  Gates  does  not  pay  this  note  when  due,  upon  notice  given 
to  aie,  I  hereby  promise  to  pay  it  in  full  myself. 

[Signed]  MORGAN. 

This  contract  is  one  of  the  obligations  known  as  personal 
security.  Now  the  purchaser  has  confidence  that  the  sev- 

,,  ,  ,.  ,.  eral  amounts  promised  by  Gates  will  be  paid 
Jicidtion  of  ... 

security  to  at  the  time  specified,  and  he  offers  Morgan 
credit.  $305,000  for  them.  The  effect  of  security  is 

to  obtain  a  more  favorable  estimate  as  to  the  value  of  the 
contracts  for  the  future  delivery  of  money  which  Morgan 
offered  for  sale ;  it  increased  the  price  obtainable  from  the 
credit  and  decreased  the  cost  of  the  money  or  other  things 
received  by  Morgan  in  exchange  for  credit. 

CREDIT  VIEWED  AS  A  "  SHORT  SALE  "  OF  MONEY 
No  better  illustration  of  a  credit  transaction  may  be 
found  than  what  is  known  as  a  "  short  sale  " — the  sale  of 
something  that  one  does  not  possess.    Pillsbury 

&  Co-  are  millers-  Thev  enter  into  a  contract 
for  the  delivery  of  10,000  barrels  of  *A*  flour 
to  Kimball  &  Co.,  of  Liverpool,  at  any  time  that  Kimball 
&  Co.  may  want  it,  after  May  1,  at  $8  per  barrel.  Their 
business  manager  has  made  a  sale  of  something  that  they 
do  not  possess— something  that  they  are  "  short "  of.  They 
have  neither  wheat  nor  flour.  The  company  has  only  a 
mill  and  other  equipment  for  making  the  kind  of  flour 
sold.  The  contract  for  future  delivery,  however,  is  im- 
portant to  the  successful  management  of  the  mill.  By  this, 
one  factor  in  the  manager's  problem  is  solved — the  price 


38  WHAT  ARE  FUNDS! 

which  he  will  receive  for  his  output.  From  business  ex- 
perience he  is  able  to  calculate  another  factor  with  sub- 
stantial accuracy,  viz.,  the  cost  of  manufacture.  If,  there- 
fore, the  manager  can  make  a  contract  which  will  fix  the 
cost  of  the  wheat  to  be  used  in  the  manufacture  of  the 
flour,  he  can  calculate  the  profits  as  well  as  if  he  had  sold 
flour  already  produced. 

Wheat  was  selling  at  99  cents  per  bushel  at  the  time 
that  the  "  short  sale  "  of  flour  was  made.    If,  the  company's 
manager  calculates,  "  No.  2  Hard  Spring  "  wheat 

maJ  be  had  at  S1  Per  bushel>  his  company  will 
make  a  profit  of  $2  per  barrel  on  the  Liverpool 
contract.  To  assure  his  company  of  this,  he  enters  into  an- 
other contract  with  Brown  &  Schaffer,  produce-brokers,  for 
the  future  delivery  of  50,000  bushels  "  No.  2  Hard  Spring  " 
wheat  "  on  call "  after  thirty  days,  at  $1  per  bushel.  But 
Brown  &  Schaffer  have  no  wheat  at  the  time  the  sale  is  made. 
They  are  "short"  of  the  commodity  contracted  for,  but, 
being  a  reliable  business  concern,  Pillsbury  &  Co.  make  a 
part  payment,  or  "  put  up  a  margin,"  and  rely  on  Brown 
&  Schaffer  for  the  delivery  of  the  grain.  The  mariager  can 
now  devote  himself  to  the  manufacture  of  flour  without 
being  troubled  about  fluctuations  in  the  price  of  wheat ;  he 
has  shifted  the  risk  of  market  fluctuations  in  the  price  of 
wheat  to  Brown  &  Schaffer.  Pillsbury  &  Co.  have  made  a 
"  short  sale  "  of  flour,  and  to  cover  the  risk  of  fluctuating 
price  they  enter  into  a  contract  for  the  future  delivery  of 
wheat. 

Brown  &  Schaffer  sold  "short"  of  "No.  2  Hard 
Spring  "  wheat  at  $1  per  bushel  for  delivery  on  demand 
Settlement  of  a^ter  thirty  days.  They  did  this  because  in 
the  short  sale  their  judgment  wheat  was  "  going  down  " ;  they 
eaf-  wished  to  buy  on  a  better  market  to  fulfil  their 
engagement  with  Pillsbury  &  Co.  Instead  of  going  down, 
however,  a  "  corner  "  is  formed  in  this  grade  of  wheat  and 
the  price  advances  rapidly.  Thirty  days  hence  Pillsbury 


CREDIT  FUNDS  39 

&  Co.  "  call "  for  the  delivery  of  25,000  bushels.  Nothing 
will  satisfy  the  contract  under  which  the  call  is  made  but 
"  No.  2  Hard  Spring " ;  this  is  the  grade  needed  for  the 
milling  process  for  the  production  of  the  kind  of  flour  sold 
to  Kimball  &  Co. ;  this  is  the  only  kind  that  will  be  re- 
ceived. Whatever  the  sacrifice  to  be  made  by  Brown  & 
Schaffor,  there  is  for  them  no  alternative  other  than  to  de- 
liver the  exact  thing  promised,  or  to  "settle" — i.  e.,  to  turn 
over  to  Pillsbury  &  Co.  $12,500,  to  pay  the  difference  be- 
tween the  contract  price  and  the  market  price,  which  on 
that  day  happens  to  be  $1.50  per  bushel.  In  other  words, 
before  Pillsbury  &  Co.  will  agree  to  "settle,"  Brown  & 
Schaffer  must  place  the  mill  company  in  a  position  to  buy 
$1.50  wheat  at  a  cost,  to  them,  of  only  $1. 

The  Pillsbury  company,  however,  have  not  the  extra 
$25,000  with  which  to  pay  for  the  wheat  needed.  The 
manager  therefore  takes  the  $12,500  received  from  Brown 
&  Schaffer  and  goes  to  Armour  &  Co.,  whose  elevator 
bins  are  filled  with  "  No.  2  Hard  Spring,"  which  they  are 
holding  at  $1.50  per  bushel ;  he  arranges  to  purchase  25,- 
000  bushels  at  $1.50,  paying  down  $12,500  (the  amount 
received  from  Brown  &  Schaffer),  giving  his  firm's  note 
for  $25,000  (principal)  and  $500  (interest),  due  in  ninety 
days  in  payment  for  the  balance.  The  wheat 
is  immediately  delivered.  Pillsbury  &  Co. 
have  purchased  25,000  bushels  of  the  kind  of 
wheat  desired.  They  have  become  the  absolute  owners  of 
it;  they  may  grind  it  and  dispose  of  it  as  they  please. 
But  how  has  the  wheat  been  paid  for '{  In  exchange,  the 
company,  in  part  consideration,  has  sold  its  contract  for  the 
delivery  of  $25,000  "  on  call "  after  ninety  days ;  it  has 
made  a  "  short  sale  "  of  money — has  again  promised  to  de- 
liver something  that  it  was  "  short "  of  at  the  time  the  con- 
tract was  made,  hoping  to  obtain  the  money  from  Kimball 
&  Co.,  of  Liverpool,  in  return  for  the  flour,  before  the 
maturity  of  the  note.  Thus,  the  calculation  is,  the  return 


40  WHAT  ARE  FUNDS? 

on  the  contract  for  the  short  sale  of  flour  will  cancel  the 
contract  for  the  short  sale  of  money,  and  the  Pillsbury 
company  will  have  the  difference  between  the  two  contracts 
as  profit. 

The  same  rules,  identically,  apply  to  the  credit  contract 
of  short  sale  of  money  as  applied  to  the  short  sales  of  flour 
and  of  wheat.  Nothing  will  satisfy  the  credit  contract  but 
the  delivery  of  the  thing  promised.  Pillsbury's  manager 

makes  a  similar  contract  on  the  purchase  of  the 
Uemm/the  remaining  25,000  bushels  of  wheat  due  from 
same  as  in  Brown  &  Schaffer ;  he  grinds  his  flour  and  de- 
TaTeof  wheat.  ]ivers  h  to  thc  Liverpool  merchants  in  time  to 

meet  the  short  sale  of  flour  to  them.  But  Kim- 
ball  &  Co.  fail  to  make  return  in  money  on  the  shipment; 
after  the  delivery  of  the  flour  Kim  ball  &  Co.  become  bank- 
rupt. Nevertheless  Pillsbury  &  Co.  must  meet  their  "  short 
sale  "  of  money — their  two  notes  for  $25,000  each  to  Armour 
&  Co.  on  demand  after  ninety  days.  This  must  be  done  even 
though  it  requires  the  sacrifice  of  working  capital,  credit 
accounts,  treasury  securities,  even  the  milling  plant  and 
business  reputation  of  the  company.  All  must  be  sold,  if 
need  be,  to  procure  the  money  for  delivery  under  the  con- 
tracts to  Armour.  Nothing  but  money  will  satisfy  the  con- 
tracts. If  the  notes  be  for  the  delivery  of  "gold  coin  of  the 
United  States,  of  present  weight  and  fineness,"  then  gold 
coin  of  this  description  must  be  delivered,  or  a  "  settlement " 
made — a  new  contract  entered  into  for  the  delivery  of  some- 
thing else  which  Armour  &  Co.  will  take  in  lieu  of  gold. 
Greenbacks  may  be  offered  instead,  and  accepted  ;  Pills- 
bury's check  may  be  taken  as  readily,  if  Armour  believes 
he  can  get  the  amount  of  gold  contracted  for  in  exchange 
for  the  check.  If  Pillsbury  &  Co.  can  not  get  greenbacks, 
or  if  they  have  not  a  bank  account,  then  they  may  offer  to 
Armour  some  real  estate  in  St.  Paul,  and  this  may  be  taken 
"  in  settlement "  of  the  short  sale.  On  the  other  hand,  un- 
less something  else  will  be  taken  "  in  settlement "  by  Ar- 


CREDIT  FUNDS  41 

mour  &  Co.,  there  is  no  alternative.      Pillsbury  must  get 
the  gold  or  be  declared  bankrupt. 

In  a  period  of  great  financial  distress — in  other  words,  at 
a  time  when  demands  for  delivery  of  money  on  credit  con- 
tracts are  large — the  price  of  money  may  deforced  up ;  all 
kinds  of  property  may  command  a  low  price  in  exchange 
for  money.  As  in  case  of  the  corner  on  wheat,  those  who 

have  sold  "  short "  of  money  may  have  to  pay  any 
A  corner  on          .  -.  .   .       .-,       .-,  .  , 

money— Fi-     price  necessary  to  obtain  the  thing  contracted 

nandal  dis-  fOFj  or  f or  guch  other  "  f unds  "  as  will  be  received 
in  place  of  money  by  way  of  "settlement." 
When  demand  is  made  for  payment,  money  may  cost  two 
or  three  times  as  much  as  at  the  time  the  contract  for  fu- 
ture delivery  is  entered  into.  Failure  to  meet  these  con- 
tracts means  bankruptcy — the  sacrifice  of  all  forms  of 
property  on  the  altar  of  "short  sales"  in  credit.  Bank- 
ruptcy is,  in  effect,  a  means  of  judicial  "settlement"  of  short 
sales  of  money  in  cases  where  the  parties  to  the  contract 
can  not  come  to  a  new  agreement  or  "settlement"  among 
themselves. 

FINANCIAL  USES  OF  CREDIT 

In  its  relation  to  finance,  credit  has  two  uses  :  (1)  It  may 
be  used  as  a  means  of  obtaining  funds.  (2)  It  may  itself  be 
used  as  "  funds."  The  second  use  is  the  subject  of  present 
consideration.  Very  often  it  happens  that  a  merchant  will 
take  his  note  to  the  bank  for  discount.  In  this  case  the 
transaction  is  one  of  exchanging  a  form  of  credit  created 
for  the  purpose  of  obtaining  "  funds "  (a  note)  for  another 
form  of  credit  which  is  created  for  the  purpose  of  being 
used  as  "  funds  "  (a  bank  account). 

FORMS  OF  CREDIT  USED  AS  "  FUNDS  " — BANK  CREDIT 

Bank  credit  is  a  form  of  contract  for  the  future  delivery 
of  money,  especially  created  to  serve  the  business  commu.- 


42  WHAT  ARE  FUNDS} 

nity  as  "  current  funds."  The  capital  of  the  bank  is  in  the 
form  of  a  "  money  fund."  This  stock  of  money  is  held  in 
reserve — is  used  to  support  its  credit.  The  whole  equip- 
ment of  a  bank  is  directed  toward  this  end,  and  its  success 
or  failure  depends  on  maintaining  its  credit  currency.  The 
obligation  of  the  bank  is  to  pay  money  on  demand.  It 
must  always  keep  in  stock  a  "  money  fund  "  sufficient  to 
meet  the  demands  of  creditors  for  delivery  of  money  under 
these  contracts.  The  larger  its  money  fund  the  greater 
the  amount  of  credit  currency  it  can  safely  sell  to  its  cus- 
tomers. About  50  per  cent  of  the  funds  of  a  well-organized 
business  community  are  in  the  form  of  bank  credit ;  about 
90  per  cent  of  the  exchanges  of  such  a  community  are  made 
for  bank  credit  in  one  form  or  another. 

There  are  several  forms  of  contracts  for  the  delivery  of 
money  which  are  sold  by  a  bank  for  use  in  a  community 
as  funds.  One  of  the  most  common  is  the  "  bank-note." 
The  bank-note  is  a  written  promise  of  the  bank  to  deliver 
or  "  pay  "  the  amount  of  money  named  on  its  face  to  the 

one  presenting  it  at  its  counter.     The  following 
Bank-notes.  l  .  ,  , 

is  a  photo-copy  ot  a  ten-dollar-note  issued  by 

the  first  Bank  of  the  United  States  in  1796.  This  form  of 
note  is  known  as  a  "  Willing  Note,"  taking  its  name  from 


Mr.  Thomas  Willing,  the  president  of  the  bank.    The  second 
reproduction  is  known  as  a  "  Biddle  Note."     It  was  issued 


CREDIT  FUNDS 


43 


by  the  second  Bank  of  the  United  States  in  1829.     In  most 
countries  bank-notes  may  be  issued  only  in  conformity  with 


certain  legal  regulations  and  under  such  guarantees  of 
government  as  to  cause  them  to  pass  from  hand  to  hand  as 
"  money."  Until  about  the  middle  of  the  last  century  this 
was  the  most  usual  form  of  "  bank  credit "  used  by  busi- 
ness men.  In  exchange  for  notes,  bills,  accounts,  etc., 
offered  to  the  bank  for  sale  by  customers,  it  would  give 


out  its  own  notes.  At  the  present  time,  however,  the  most 
common  form  of  bank  credit  is  the  bank-account — a  credit 
fund  represented  on  the  books  against  which  the  person 
owning  it  may  draw  checks  in  any  amount  desired.  The 
"  notes "  of  the  bank  are  purchased  by  its  customers,  be- 
cause they  may  be  passed  from  hand  to  hand  in  the  com- 
munity as  current  funds.  They  are  considered  as  good  as 


44 


WHAT  ARE  FUNDS! 


money  because  the  community  believes  the  bank  issuing 
them  to  be  so  conducted  that  it  can  at  all  times  deliver  the 
money  contracted  for  if  demand  be  made,  and,  being  more 


convenient  to  carry  about  than  gold  and  silver,  the  notes 
are  preferred.  The  bank-account  adds  to  this  convenience 
that  of  allowing  the  business  man  to  draw  for  the  exact 
amount  needed.  In  the  early  half  of  the  last  century  there 
were  many  abuses  of  public  confidence  on  the  part  of  banks. 
Each  State  had  its  own  peculiar  laws,  and  many  projects 
were  devised  which  flooded  the  country  with  bank-notes 
that  proved  worthless.  This  caused  the  Federal  Govern- 


ment to  pass  stringent  laws  regulating  issues  and  deposits. 
In  the  United  States,  at  present,  "  national  banks "  alone, 
issue  notes.  These  notes  are  also  called  "  circulation," 


CREDIT  FUNDS  45 

A  bank-credit  "  account,"  sometimes  called  a  deposit,  is 
in  reality  not  a  deposit  in  any  sense  of  the  word.  The  cus- 
Bank-  tomer  of  the  bank  takes  to  it  money  and 

accounts—  "  checks  "  (or  other  promises  and  orders  to  pay 
Deposi  s.  money)  which  are  owned  by  him  and  sells 
them  ;  he  exchanges  these  for  an  "  open  account "  at  the 
bank.  The  customer  desires  a  credit  pt  the  bank  because 
it  will  serve  him  better  than  any  other  form  of  current 
funds.  The  exchange  takes  place  by  reason  of  the  fact 
that  each  gains  a  business  advantage  by  so  doing.  The 
bank  can  use  the  money  and  checks  purchased  ("  deposited  ") 
to  greater  advantage  than  can  the  customer,  while  the  cus- 
tomer can  use  the  current  credit  of  the  bank  to  better  pur- 
pose in  his  business  than  can  the  bank  itself. 

It  sometimes  happens  that  the  banks  are  reduced  to  a 
condition  in  which  their  money  reserves  are  threatened, 
and  with  this  their  contracts  for  delivery  of  money — i.  e., 
their  outstanding  credit.  Various  temporary  expedients 
are  at  such  times  resorted  to,  such  as  the  creation  of  credit 
instruments  that  will  be  received  in  "  settlement "  in  lieu  of 
money,  but  which  are  not  contracts  for  the  immediate  pay- 
ment (or  delivery)  of  money  over  the  counters. 
For  example,  during  the  financial  crisis  of  1893 
the  Marine  Bank  of  Buffalo  issued  to  its  em- 
ployees a  form  of  certified  check  for  payment  of  wages  and 
salaries ;  instead  of  giving  them  money  in  payment  of 
credit  accounts,  they  issued  a  new  contract  for  future  de- 
livery of  money,  which  the  owner  or  borrower  could  pass 
in  the  community,  in  settlement  of  his  own  credit  obliga- 
tions, until  the  bank  should  be  able  to  take  up  these  checks 
without  impairing  its  reserve.  Likewise,  the  South  Chatta- 
nooga Savings-Bank,  not  having  money  to  deliver,  on  de- 
mand, to  those  wishing  to  withdraw,  in  August  of  that 
year  issued  a  new  contract  for  the  delivery  of  "current 
funds  "  four  months  hence,  a  copy  of  which  is  given  on  page 
46,  This  form  of  currency  temporarily  answered  as  funds  to 


46  WHAT  ARE  FUNDS! 

those  receiving  it,  and  the  certificates  were  taken  in  "  settle- 
ment "  of  the  contract  of  the  bank  entered  into  at  the  time 


THIS    IS    TO    CERTIFY,    THAT  THERE   HAS   BtEN    DEPOSITED   IN  THIS    BANK    FIVE    DOLLARS,    PAYABLE  TO  Tt 
EARED  OF  THIS  CERTIF.CATE,    IN  CURRENT    FUNDS  FOUR   MONTHS  FHOM  DATE. 

CHATTANOOGA,  TENN.  AUG.  19,  1893.  SOUTH    CHATTANOOGA   SAVINGS    BANK. 


TH,8  CERriF.CATE  WILL  BE   RECEIVED  ON  DEPOSirflO  V  OF  ANY   DEBT  OR  OBLIGATION  TO  THE 

FIRST    NATIONAL    BANK,  £     ^     ^CITIZENS    BANK  &   TRUST   CO., 


THIRD    NATIONAL    BANK,                ft    "*     OiWIEHL,    PROBASCO   &   CO., 
CHATTANOOGA  NATIONAL  BANK  '^€€«'    CHATTANOOGA    SAVINGS    BANK, 
SOUTH    CHATTANOOGA    SAVINGS    BANK. 


TIONAL  BANK,   A9  CUST 


the  deposit  was  made.  During  the  financial  strain  or  "panic" 
in  1S93,  the  enforcement  of  contracts  for  delivery  of  money 
would  have  caused  the  hanks  of  New  York  to  sacrifice  their 
entire  assets  to  obtain  the  gold  or  other  forms  of  "  current 
funds."  They  had  sold  to  their  customers  "demand  cred- 


No.  OOOO  $2O.OOO. 

Loan  Committee  of  the  New  York  Clearing  Honse  Association. 


This  Certifies,  that  the. 


fiats  deiKix'itnl  irjfli  tfiiji  Committee,  tecinitiex  in  accordance  with  the  proceed- 
ings of  a  Meeting  of  the  Association,  helrl  June,  1-itfi,  18!)3,  upon  which  this 

''  ' 


I'n'titicnt,  ininKiinl.  Tliix  ('erfififtite  >ni'i  >it>  rrceh'eit  in  »a>/ment  of  balances 
at  the  Clearing  Home  for  the  turn  of  TWENTY  THOUSAND  DOLLARS, 
from  any  Member  of  the  Clearing  House  Association. 


On  Ihe  surrender  of  this  Certificate  by  the 
deptwitinz  Bank  above  named,  the  Commit, 
tee  will  endorse  the  amount  as  a  pivment  on 
the  obli-ation  of  said  Pank,  held  by  them, 
and  surrender  a  proportionate  share  of  the 
collateral  wcurltirs  held  therefor. 

$20,000. 


its,"  "short-time"  current  funds  with  which  to  meet  them. 
To  tide  over  this  emergency,  clearing-house  certificates  were 
agreed  upon,  to  be  taken  in  settlement  between  each  of  the 
clearing-house  banks.  Since  they  could  use  certificates  of 
indebtedness  of  the  Clearing-House,  collaterally  secured  by 


CREDIT   FUNDS 


assets  of  the  bank,  this  form  of  credit  funds  avoided  the 
necessity  of  selling  the  assets  to  obtain  gold  for  payment. 


PWE,  CES'IS 

Wilk«b»rre,  M»rch]M1816. 


Merchants  and  manufacturers  may  resort  to  the  same 
kind  of  expedients  during  periods  of  financial  stress  as  that 
above  described  with  reference  to  issues  by  banks.  They 
may  "settle"  their  wages-accounts  by  means  of  "scrip," 


Emergency  as  **  ls>  ca^ec^  —  *•  e->  PaJ  a  credit  contract  which 
funds—  Com-  is  due  with  another  contract  for  delivery  of 
money  or  goods  at  a  definite  future  time  ;  and 
the  various  merchants  or  business  men  of  the  community, 
believing  that  the  one  issuing  the  "  scrip  "  will  be  able 


to  meet  it  after  the  financial  strain  is  past,  are  willing  to 
take  it  in  payment  for  goods  and  the  scrip  passes  current. 
Every  period  of  financial  strain  or  business  depression 
since  the  Revolutionary  War  had  its  scrip  issues.  After 


WHAT  ARE  FUNDS? 


the  War  of  1812  there  was  great  financial  distress,  during 
which  time  the  country  was  virtually  without  metallic  cur- 


g/jtWiy  7tSev*s»+tS  .-,  /  Jt..,  ,/K  ,„.„.  ^  :  „ 

TEN  CENTS,    | 

,'v  r,,,|V  s 

(jf? 

\    ' »  '   "Tin  /"or/  Deponl,  Ju/y  -?^  ^^  -1 


rency.  To  meet  this  emergency  business  houses  and  con- 
cerns of  every  kind  issued  "  shinplasters,"  as  they  were 
called.  ^  The  first  here  exhibited  is  from  an  issue  of  the  Old 
Easton  &  Wilkes  Barre  Turnpike  Company.  From  1837- 
'41  the  issues  of  private  concerns  were  almost  the  only 
currency  in  use.  The  scrip  of  the  Camden  &  Woodbury 


Transportation  Company  and  that  of  the  Chesapeake  & 
Ohio  Canal  Company  are  good  illustrations  of  the  form  of 
funds  in  current  use  by  transportation  concerns  of  the  time. 
The  demand  for  "  change  "  at  this  time  finds  illustration  in 
the  issues  of  the  Marion  Change  Association  of  Marion, 
Ala.  Being  without  money  or  means  of  carrying  on 
transactions  with  their  customers,  the  leading  business  men 


CREDIT  FUNDS 


of  the  place,  whose  names  appear  at  the  top  of  the  bill, 
organized  for  mutual  accommodation.     Certificates  of  de- 


THIS  C 

•:  «*  ?.  ft  ,it 


posits  of  savings-banks  were  also  put  into  use  as  money  in 
denominations  to  suit  the  convenience  of  customers.     An- 


other  form  of  currency  is  what  is  known  as  a  dividend  war- 
rant.    It  is  intended  to  serve  as  fun  Js  without  putting  the 


^rtj&l&y 


50 


WHAT  ARE  FUNDS? 


concern  to  the  ne- 
cessity of  raising 
funds  to  pay  divi- 
dends. Generally 
speaking,  it  is  a 
dangerous  expe- 
dient, and  indi- 
cates financial 
weakness  in  the 
company  using 
it.  The  dividend 
warrant  is  some- 
times used  as  a 
means  of  making 
sales  of  property 
which  a  company 
may  have  on  the 
market.  The  div- 
idend or  income 
warrant  here  ex- 
hibited is  of  this 
sort. 

Various  depart- 
ments of  the  Gov- 
ernment may  at 

Public  tini68 

emergency  find 
currency.  them. 

selves  under  tem- 
porary financial 
disability  —  may 
not  be  able  to 
meet  outstanding 
credit  demands  or 
procure  funds  for 
necessary  pur- 


CREDIT  FUNDS  51 

chases.  Instead  of  making  the  sacrifices  necessary  to  pro- 
cure gold  or  other  current  funds  demanded,  new  contracts 
for  the  future  delivery  of  money  may  be  sold  or  exchanged 
for  old  ones  already  matured.  A  copy  of  a  certificate  of 
indebtedness  or  obligation  of  the  town  of  Fayetteville,  Ark., 
as  issued  in  1842,  is  here  exhibited.  Nearly  all  the  States 


and  local  divisions  of  States  were  at  that  time  bankrupt 
from  having  undertaken  public  improvements  in  the  form 
of  canals,  railroads,  and  turnpikes.  These  notes  were  paid 
out  to  officers  and  others  having  credit  claims  against  the 
towns,  and  were  circulated  in  the  community  in  the  same 
way  as  are  national  bank-notes  to-day.  The  scrip  of  the 
town  of  Port  Deposit  issued  during  the  depression  of  185T, 
and  that  issued  by  the  same  town  in  1862,  when  the  levies 
of  war  had  depleted  local  funds,  are  good  examples  of  the 
emergency  currency  issued  by  towns  at  a  later  time.  After 
the  catastrophe  at  Johnstown,  Pa.,  a  similar  financial  method 
was  resorted  to.  Bond  certificates  in  convenient  denomina- 
tions, to  the  amount  of  $20,000,  were  put  into  circulation 
as  a  means  of  meeting  current  necessity.  In  1893  the  city 
of  Richmond  issued  a  6-per-cent  bond  certificate  of  similar 
character.  The  "  warrants"  of  counties  and  school  districts 
find  like  employment.  The  one-  and  two-year  "interest 
notes"  issued  by  the  National  Government  during  the 
civil  war  were  "  emergency  currency "  for  the  use  of  the 
Federal  Government.  They  were  contracts  for  the  delivery 
5 


WHAT  ARE  FUNDS? 


of  money  one  or  two  years  from  date  given,  in  settlement 
for  credit  claims  due,  and  on  which  demand  for  payment 


PORT  DEPOSIT  LOAN. 

TWENTY  FIVE  CtNTS 


had  been  made.  The  United  States  note  or  "  greenback  " 
was  originally  a  species  of  emergency  currency  in  the  nature 
of  a  contract  for  the  delivery  of  gold  or  silver  coin  "on  de- 
mand." It  was  understood,  however,  at  the  time  of  issue, 
that  the  demand  would  not  be  met  until  the  Government 
had  the  necessary  gold  and  silver  in  the  Treasury  with  which 
to  meet  it.  The  result  was  that  the  notes  did  not  pass  "  at 


par"  with  gold  or  silver,  but  were  received  at  a  discount 
proportionate  to  the  estimates  of  value  based  upon  them  by 
those  receiving  these  promises. 

COMMERCIAL  CREDIT  FUNDS 

Commercial  credit  or  contracts  for  the  future  delivery 
of  money  are  frequently  given  and  received  in  transactions 


CREDIT  FUNDS  53 

with  merchants,  as  between  those  using  them  they  answer 
every  purpose  as  "funds."  The  practise  allows  merchants 
to  make  sales  and  customers  to  make  purchases.  Under 
such  credit  arrangements  a  customer  may  order  goods  of  a 
house  "  on  credit "  and  make  "  settlement "  for  the  credit 
at  a  future  time.  The  promise  to  pay  is  unwritten;  it 
may  be  made  by  tacit  understanding.  Some  memorandum  of 
the  transaction  is  usually  taken  at  the  time,  although  it  may 
be  left  entirely  to  the  memory  of  the  parties  without  any 
form  of  entry.  A  large  part  of  the  mercantile  business  of 
the  country  is  conducted  in  this  way.  When  one  opens  an 
account  at  a  store  he  may  make  definite  arrangements  to 
have  all  purchases  "  charged  " — that  is,  entered  on  the  books 
— statements  to  be  made  and  settled  on  the  first  of  each 
month.  When  the  customer  is  well  known,  however,  and 
his  ability  to  pay  is  undoubted  by  the  merchant,  he  may 
order  goods  without  any  previous  arrangement.  In  this 
case  it  will  be  tacitly  understood  that  the  purchaser  of 
goods  will  pay  the  account  when  demand  is  made.  One 
may  go  to  a  grocer  and  say,  "  Please  send  out  a  barrel  of 
No.  2  Pearl  flour."  The  merchant  will  deliver  the  flour 
and  charge  the  price  to  purchaser's  account  on  his  books. 
The  contract  for  payment  is  just  as  well  understood  as  if  a 
definite  formal  arrangement  had  been  made.  A  manu- 
facturer usually  has  many  such  arrangements  with  laborers, 
material  men,  and  business  houses  with  which  he  deals.  So 
a  retail  merchant  will  deal  on  similar  funding  arrangements 
with  wholesalers,  and  wholesalers  with  producers.  This 
form  of  credit  is  not  transferable  except  by  special  agree- 
ment, and  can  not  pass  current  in  the  community.  It 
answers  as  funds  only  to  the  one  with  whom  the  contract 
for  future  delivery  is  made. 

In  all  lines  of  mercantile  business  "the  books  "  will 
show  a  large  number  of  current  credits — that  is,  the  regular 
customers  will  have  an  understanding  that  all  orders  will 
be  honored  to  a  certain  amount,  settlements  to  be  made  at 


54  WHAT  ARE  FUNDS? 

stated  intervals.     The  goods  purchased  in  this  way  become 

the  property  of  purchasers  as  absolutely  as  if  money  had 
been  paid  for  them.  Goods  are  exchanged  for 
credit  on  open  account.  The  merchant  has  a 
right  to  enforce  the  collection  of  the  claim  in 

the  same  manner  as  if  a  promissory  note  had  been  given. 
It  often  happens  that  two  merchants,  or  a  manufacturer 

and  a  merchant,  may  each  wish  to  run  an  account  with  the 
other.  In  this  case  each  will  make  entry  of 

wtdif  goods  purchased,  and  at  the  end  of  the  month 

or  year  settlement  will  be  made  by  exchange  of 

statements  of  account  and  the  payment  of  the  balance  due. 


CHAPTEK  IV 
INSTRUMENTS  OF  TRANSFER  OF  CREDIT  FUNDS 

EVEKY  purchase  and  sale  involves  an  exchange  in  pos- 
session and  ownership.  Money  funds  when  used  in  ex- 
change are  passed  from  hand  to  hand.  Many  forms  of 
credit  funds,  however,  do  not  admit  this  method  of  trans- 
fer. For  the  purpose  of  making  transfer  of  credit  funds, 
several  classes  of  instruments  have  come  into  vogue,  each 
adapted  to  some  special  use  or  to  the  transfer  of  some  special 
form  of  credit  funds. 

The  most  common  form  of  instrument  used  for  the 
transfer  of  credit  funds  is  the  "  customer's  check."  A 

$10,000  credit  account  is  purchased  at  a  bank 
The  custom-     ,  /•        ,  i  <?         i  • 

ers  check.  "J  a  customer  for  the  purpose  of  making  cur- 
rent purchases  and  payments.  He  then  buys  a 
stock  of  goods  for  $1,000.  In  exchange  for  the  goods  the 
customer  of  the  bank  transfers  $1,000  of  his  credit  account 
to  the  one  from  whom  the  goods  were  purchased.  To  do 
this  he  draws  his  check  for  the  amount. 

A  "  customer's  check  "  is  a  sight  draft  on  a  bank  for  the 
payment  of  the  amount  of  money  stated  therein,  to  a  third 

person,  "  on  account "  of  the  maker.     It  differs 
Form  and         >•  j.  •  i     •>      <•       •        i         >     • 

significance  *rom  ordinary  commercial  drafts  m  that  it  is 
of  a  "custom-  drawn  against  an  account  purchased  of  a  banker 
er  s  check."  /•  ,  i  /.  j  . 

for  the  very  purpose  of  drawing  against  it ; 

the  bank  is  therefore  bound  to  honor  the  check  when 
presented.  The  check  need  not  be  in  any  prescribed  form  ; 
it  may  be  written  on  a  blank  sheet  of  paper,  with  a 

55 


56  WHAT  ARE  FUNDS! 

pencil  or  entered  on  the  printed  forms  of  a  bank.  It  is 
for  the  sake  of  convenience  and  uniformity  that  banks 
provide  blank  checks  for  the  customers.  These  blanks 
are  usually  bound  and  given  out  to  the  regular  customers 
of  the  bank  in  book  form.  Each  check  usually  has  a 
"  stub,"  or  short  end,  which  is  left  in  this  book  after  the 


PULASKI  CITY.VA 190 No.. 


THE  PUIASKI  NATIONAL  BANK 

pA"'  ORDE  R  OF $ 


_BOLLARS 


check  itself  has  been  torn  out,  on  which  memoranda  may 
be  entered  for  the  convenience  of  the  customer — it  assists 
him  in  keeping  a  record  of  the  transfers  made  by  him,  and 
of  the  amount  of  such  credit  fund  still  remaining  at  the 
bank  against  which  checks  may  be  drawn. 

As  before  stated,  no  particular  form  is  necessary,  and  a 
lead-pencil  will  serve  as  well  as  ink.     The  hona-fide  inten- 
tion of  the  one  owning  the  fund  or  account  is 
How  to  make 
out  a  all  that  it  is  necessary  for  the  bank  to  know. 

'  ^ut  certam  ru^es  should  be  followed  as  a  matter 
of  convenience  to  the  bank  and  precaution  to 
the  drawer.  In  writing  and  signing  checks  good  black  ink 
should  be  used. 

Checks  should  be  dated,  but  the  absence  of  the  date 
does  not  warrant  a  bank  refusing  to  cash  them.  While  a 
note  executed  on  Sunday  is  not  good  in  many 
jurisdictions,  a  check  so  dated  is  valid.  A  post- 
dated check  does  not  make  the  bank  liable  for 
payment  if  presented  before  the  date  entered.  Checks 
should  never  be  issued  under  an  arrangement  with  the 
holders  that  they  will  not  present  them  till  a  subsequent 


INSTRUMENTS  OP  TRANSFER  57 

date,  inserted  on  the  face  of  the  instrument,  as  such  prac- 
tise often  leads  to  complications  of  business  relations  which 
wreck  the  credit  of  the  maker  and  put  the  bank  to  endless 
trouble. 

A  check  may  be  drawn  for  any  amount,  so  long  as  it 

does  not  exceed  the  "  credit  fund  "  of  the  one  drawing.     In 

the  office  of  the  Pacific  Mills,  Boston,  may  be 

fhe^noimt  8Cen  the  canceled  check  of  the  Ullited  States 
for  one  cent ;  on  the  walls  of  the  Bank  of  Com- 
merce, New  York,  is  a  check  for  $14,000,000,  signed  by 
the  banking-house  of  Kidder,  Peabody  &  Co.  In  this  ap- 
pears one  of  the  great  economies  of  the  use  of  bank  credit. 
It  is  just  as  easy  to  transfer  $14,000,000  in  form  of  credit 
funds  at  the  bank  as  it  is  to  transfer  one  cent.  In  writing 
in  the  amount,  the  drawer  should  begin  at  the  extreme  left 
of  the  line.  The  illustration  here  given  is  a  copy  of  a  check 
drawn  by  Andrew  Jackson  on  the  second  Bank  of  the 
United  States,  for  one  dollar.  It  is  an  excellent  example  of 
a  poorly  written  check,  and  one  which  could  be  very  easily 


b.  .     Philadelphia,  >Y   ,  <-       ,/,?.         iK-.»/ 

BANK  OF  THE  >^3|fek UNITED  STATES, 

„ 
PAY  to      Cf/s*>4^      ~*T.f**,/'S<-/'ftl  or  Bean,; 


—    Dollars^ 


"raised."  One  receiving  such  a  check  might  write  " one 
hundred "  before  the  word  "  one,"  and  "  10 "  before  the 
figure  "  1,"  and  in  this  way  raise  the  check  from  $1  to 
$101.  If  this  were  done,  and  the  bank  cashed  the  check, 
the  bank  would  not  be  responsible  for  the  loss.  The  drawer 
would  be  held  responsible  for  his  own  carelessness.  This 


58  WHAT  ARE  FUNDS? 

method  of  raising  checks  is  the  one  most  common  in  bank 
ing  experience.  It  is  wise  to  begin  the  writing  at  the  left- 
hand  margin,  or  draw  a  running  line  .^v^~-^~>^v~^v~>. 
before  as  well  as  after  the  written  words,  thus  preventing 
any  additional  writing.  The  check  here  exhibited,  drawn 
by  Daniel  Webster  on  the  Boston  branch  of  the  Bank  of 
the  United  States,  is  a  carefully  drawn  instrument.  When 


Office  of  Discount  and  Deposit  of  the  Bank  of  the  United  Sl&s. 


h     7.f0      Dolls.  Cts.     _z  BOSTON,   ,f.:i>.  2  f      18  L  X~ 

or  iicarcv, 

Dollars  TOO 


cheeks  in  which  the  figures  in  the  margin  do  not  correspond 
with  the  amounts  stated  in  the  body  of  the  checks  are  pre- 
sented to  banks  for  payment,  the  courts  have  decided  that 
the  amount  stated  in  writing  shall  be  considered  correct. 
The  usual  practise,  however,  is  for  the  paying  teller  to 
withhold  payment  until  he  may  satisfy  himself  as  to  the 
intention  of  the  maker  of  the  check. 

It  is  not  necessary  to  enter  the  name  of  the  one  to  whom 
the  credit  funds  are  to  be  transferred.  If  a  check  is  drawn 
Entering  the  "  ^J  to  Bearer,"  any  person  that  is  the  bearer 
name  of  the  can  collect  it  and  no  name  need  be  inserted. 
The  name  of  a  definite  payee  may  be  inserted, 
as,  for  example,  "  Pay  to  Leonidas  Smith."  Usually,  how- 
ever, checks  are  drawn  to  some  person  "  or  order."  The 
phrase  "  Pay  to  the  order  of  Leonidas  Smith  "  signifies  that 
the  amount  is  to  be  transferred  or  delivered  to  Leonidas 
Smith,  or  to  any  person  to  whom  he  orders  it  paid. 

It  is  customary  to  number  checks  consecutively  in  the 
check-book  so  that  each  one  can  be  accounted  for.  The 
numbers  are  inserted  for  the  convenience  of  the  custom- 


INSTRUMENTS  OP  TRANSFER  59 

er,  and  not  for  the  convenience  of  the  bank.  The 
checks  (or  "  vouchers,"  as  they  are  called  after  they  have 
Checks  been  paid)  when  returned  may  thus  easily  be 

should  be  compared  with  the  "  stubs  "  of  the  check-book, 
red'  or  pasted  back  into  the  book  and  filed  for 
easy  reference. 

A  check-book  is  a  bound  collection  of  blank  orders  for 
the  transfer  of  bank  credit.  The  advantage  of  binding  is  that 
the  "  stubs"  may  be  kept  for  reference.  By  ref- 
~  check-book"  erence  to  the  memoranda  so  kept  the  customer 
may  at  any  time  know  what  amount  of  funds  re- 
main subject  to  draft.  The  "  bank-book  "  or  transcript  of 
deposits  shows  the  other  side  of  the  customer's  accounts. 
At  the  end  of  each  month  this  is  left  at  the  bank  that  the 
amounts  drawn  may  be  entered  and  a  balance  struck.  If 
the  bookkeeper's  balance  is  different  from  the  customer's, 
this  may  be  accounted  for  by  checks  drawn  but  not  pre- 
sented for  payment.  There  being  no  mistake,  the  book- 
keeper's balance,  less  checks  outstanding,  will  equal  the 
balance  appearing  on  the  stubs  of  the  check-book.  The 
unpaid  checks  may  be  presented  at  any  time ;  therefore 
the  available  balance  of  account  is  the  amount  shown  by 
the  "check-book."  After  the  "bank-book"  has  been  bal- 
anced, the  paid  checks  are  returned  as  "  vouchers." 

If  one  wishes  to  draw  money  on  his  own  account  the 
check  should  be  written  "  Pay  to  the  order  of  Cash."  This 
Drawing  *8  preferable  to  a  check  drawn  to  "  Bearer."  A 
check  to  check  drawn  to  "  Cash  "  will  not  be  paid  to 
any  one  but  the  drawer  or  his  well-known 
representative,  while  a  check  payable  to  bearer,  if  lost, 
might  be  misused.  A  check  written  "Pay  to  the  order 
of  ....  [your  own  name]  .  .  . ,"  will  necessitate  an  indorse- 
ment— i.  e.,  one  drawing  to  himself  would  be  required  to 
indorse  his  own  check  before  he  could  get  it  cashed. 

One  wishing  to  draw  a  check  to  pay  a  note  may  make 
it  payable  " To  the  order  of  Bills  Payable"  One  buying 


60  WHAT  ARE  FUNDS! 

a  draft  may  indicate  this  in  proper  language,  as  "  Pay  to 
the  order  of  N.  Y.  Draft  and  Exchange"     Any  special 

personal  use  may  be  indicated  on  the  face  of 
to  oneself        the  instrument. 
for  special  Likewise,  a  check  drawn  to  another  may  have 

the  purpose  or  use  of  the  funds  transferred  indi- 
cated on  its  face ;  as,  for  example,  "  Pay  to  the  order  of  John 
Jones,  for  September  rent."  When  the  check  has  been  re- 
Checksdrawn  Burned,  indorsed  by  John  Jones  and  paid  by 
to  others  for  the  bank,  it  will  answer  the  double  purpose  of 

"voucher"  from  the  bank  and  of  receipt  of 

payment  of  "  September  rent."  A  settlement 
of  wages  may  be  made  by  check,  marked  "  Pay  Eoll "  or 
"  Wages."  When  objection  is  made  to  this,  it  is  best 


always  to  conform  to  the  wishes  of  the  bank— it  is  an  un- 
necessary encumbrance  of  the  paper  which  is  intended  to 
represent  relations  between  customer  and  bank  only.  The 
transactions  between  Jones  and  the  bank's  customer  may 
be  represented  in  some  other  way.  A  bank  will  make 
no  objection  to  the  matter  on  the  face  of  a  check  if 
it  is  printed  or  engraved,  and  has  not  to  be  written 
or  inserted  at  the  time  it  is  drawn.  The  above  form 
states  the  object  for  which  the  transfer  is  made.  The 
large  corporations  of  to-day  have  checks  especially 
printed  for  nearly  every  account  against  which  drafts  are 
made.  Other  forms,  quite  as  unobjectionable  and  more 


INSTRUMENTS  OF  TRANSFER  61 

simple  in  style,  have  the  purposes  of  their  issue  printed  in 
red  ink  across  the  face,  or  engraved  in  some  form. 


NJL 


Many  safety  devices  have  been  used  to  prevent  the  fraud 
ulent  alteration  of  checks.  A  customer  may  have  an  en- 
Safety  graved  check-form  of  his  own,  and  will  notify 

devices  in  his  bank  that  it  may  honor  those  onlv  which 
are  drawn  on  this  prescribed  form.  But  even 
then  the  prescribed  blanks  may  get  into  the  hands  of  those 
who  would  use  them  for  purposes  of  fraud.  As  a  means  of 
preventing  alteration  and  forgery,  the  amount  may  be 
punched  or  cut  out  of  the  paper.  This  safety  device  has 
been  circumvented  by  having  the  holes  filled  with  paper 
pulp  and  new  figures  cut  or  punched  to  suit  the  purposes 
of  swindlers.  Some  companies  have  their  checks  limited  on 


their  faces.  The  best  device  yet  adopted,  however,  to  prevent 
"  raising  "  is  that  employed  by  the  express  companies  and  the 
Post-Ofiice  Department.  These  will  be  explained  later. 


62  WHAT  ABE  FUNDS  f 

A  novel  instrument,  used  by  the  banks  to  save  their  cus- 
tomers the  expense  of  paying  the  stamp  tax  imposed  by  the 
Government  to  help  defray  the  cost  of  the  Spanish- Ameri- 
can War,  is  given  below.  It  is  in  form  a  receipt  for  funds 
transferred  or  withdrawn.  The  internal  revenue 
^aw  Provided  for  a  minimum  tax  of  two  cents 
on  each  check.  Instead  of  presenting  a  check, 
the  customer  would  sign  a  receipt,  and  the  bank  would  there- 
upon make  the  payments  or  deliver  the  funds  for  which  the 


receipt  was  drawn.  This  was  in  general  use  in  many  parts 
of  the  country  for  direct  dealings  of  customers  with  banks. 
It  is  sometimes  a  convenience  in  business  to  give  to 
some  one  else  the  power  to  check  against  one's  bank-ac- 
How  to  count.  This  may  be  done  by  giving  to  another 

olhersfo6  *>  power  of  attorney — i.  e.,  the  right  or  author- 
draw on  ones  ity  to  be  your  attorney,  to  represent  you  in  the 
account.  transfer  of  funds  on  your  account  at  a  bank. 
Authority  of  this  kind  must  be  in  writing,  unless  the  bank 
is  willing  to  take  the  responsibility  for  oral  authorization. 
Financial  houses,  as  well  as  the  United  States  Post-Office, 
issue  printed  blanks  for  use  by  those  who  wish  to  give  to 
others  the  power  to  draw  on  their  accounts  or  to  sign 
money -orders.  A  power  of  attorney  from  Daniel  Web- 
ster to  Mrs.  Webster,  giving  her  authority  to  draw  and  sign 
checks,  is  represented  opposite.  This  was  first  reproduced  in 
Rhodes' s  Journal  of  Banking ;  it  was  taken  from  the  files 
of  the  bank  where  it  was  used  by  Mrs.  Webster. 


INSTRUMENTS  OP  TRANSFER 


63 


The  "  crossed  check  "  is  a  form  of  customer's  check  not 
commonly  found  in  America.     In  England,  however,  it  is 
in  common  use.     It  is  an  ordinary  customer's 
check  tnat  has  across  its  face  bars  which  signify 
that  it  must  be  presented  for  payment  through 
some  other  banker.     Such  a  check  will  not  be  cashed  if 
presented  by  the  payee  himself  to  the  bank  against  which 


it  is  drawn.     The  object  of  such  a  check  is  to  have  it  first 
presented  to  a  bank  to  whom  the  payee  is  known,  and 


64  WHAT  ARE  FUNDS? 

whose  indorsement  will  be  accepted  as  a  guarantee  of  the 
credit  of  the  maker.  When  a  check  is  crossed  "  in  blank  " 
— that  is,  has  two  lines  drawn  across  its  face  with  "  &  Co. " 
inserted — it  may  be  presented  for  payment  to  any  bank 


other  than  the  one  on  which  it  is  drawn ;  but  when  it  is 
"  specialized  " — i.  e.,  when  it  is  crossed  or  has  stamped  across 
it  the  name  of  a  particular  bank — it  must  first  be  presented 
to  that  bank  for  payment.  A  law  has  been  enacted  in 
England  which  prohibits  the  payment  of  a  crossed  check  by 
a  bank  against  which  it  is  drawn  until  it  has  been  presented 
through  another  bank.  If  the  drawer  of  a  check  knows 
the  payee's  bank  he  will  usually  "  specialize "  it ;  if  his 
bank  is  unknown,  the  check  is  crossed  "  in  blank,"  and  the 
bank  paying  it  is  held  for  proper  indorsement.  The 
"  crossed  check  "  is  a  more  secure  form  of  negotiable  in- 
strument than  the  ordinary  "  customer's  check."  It  is  use- 
less in  the  hands  of  the  wrong  person.  We  have  reached 
practically  the  same  end  in  this  country  by  having  stamped 
on  checks  intended  for  circulation  as  negotiable  paper  the 
words,  "  Payable  only  through  .  .  .  Clearing-House  when 
properly  indorsed." 

The  use  of  the  "  crossed  check "  has  given  rise  to  an 
institution  known  as  a  "  cheque-bank."  This  form  of  bank 
sells  to  its  customers  a  book  of  its  checks,  the  amount  for 


INSTRUMENTS  OP  TRANSFER  65 

which  each  may  be  drawn  being  limited  on  the  face  of  the 
check  itself.  For  example:  A  book  containing  50  blank 
checks,  each  of  which  may  be  drawn  for  the 
maximum  amount  of  $10,  may  be  purchased 
for  $500.  When  the  book  is  finally  presented 
at  the  bank  for  settlement,  the  bank  will  return  to  the  cus- 
tomer the  canceled  and  paid  checks  ;  the  difference  between 
the  amount  of  drafts  actually  made  and  the  amount  paid 
for  the  book  will  be  returned  to  the  customer,  or  credit  will 
be  given  on  the  purchase  of  a  new  book.  Check-books  are 
made  up  of  assorted  blanks,  to  suit  the  customer's  conve- 
nience. Such  books  may  be  had  at  the  main  office,  or  at  any 
of  the  other  banks  which  serve  as  correspondents  of  the 
"  cheque-bank." 

The  "  customer's  check  "  is  the  instrument  usually  em- 
ployed for  the  transfer  of  funds  from  one  bank  customer 

to  another  where  business  relations  are  such  as 
Other  instru-    ,  ,         ,  ,    ,  ,          T        ..         , 

mentsof         to  make  them  acceptable.     It  often   happens, 

transfer  of  however,  that  a  customer  will  find  it  desirable 
to  have  funds  in  a  bank  where  he  is  not  known, 
or  will  desire  to  make  payment  to  one  who  does  not  care  to 
take  the  risk  of  a  private  check.  In  such  case  some  other 
form  of  instrument  of  transfer  will  be  used. 


For  this  purpose  one  of  the  most  common  devices  is  the 
"  certified  check."  The  customer  will  draw  his  check  for 
the  amount  desired,  and  this  will  be  handed  to  the  cashier 


66  WHAT  AKE  FUNDS! 

of  the  bank  in  which  he  has  funds.  The  cashier  will  there- 
upon write  across  the  face  "  Certified,"  or  "  Good  when 
properly  indorsed,"  over  his  official  signature,  and  charge 
The  "  certi-  the  same  against  the  customer's  account.  This 
fied  check  "  amounts  to  a  transfer  to  the  bank  of  the  amount 
"cashier's  drawn,  and  a  guarantee  on  the  part  of  the  bank 
check."  that;  the  funds  will  be  transferred  to  the  owner 

of  the  check  on  presentation.  Another  form  is  the  "cash- 
ier's check."  To  obtain  a  cashier's  check  the  customer  will 
exchange  his  own  check  for  that  of  the  cashier— i.  e.,  the 


amount  of  funds  represented  by  the  check  will  be  formally 
turned  over  to  the  bank,  and  the  bank,  through  its  cashier, 
will  thereupon  deliver  its  own  instrument  of  transfer  to  the 
customer,  made  payable  to  such  person  as  the  customer  may 
direct.  Another  form  of  instrument  of  transfer  of  credit 
funds  v.sed  between  banks  is  the  bank  draft.  One  of  the 
most  artistic  engravings  of  this  kind  is  given  on  the  oppo- 
site page — a  form  of  draft  used  by  the  "  Biddle  Bank  "  for 
business  with  its  correspondents. 

The  money-order  is  an  instrument  of  transfer  of  funds 
created  for  a  special  purpose.  For  example :  One  wishes 
to  send  $50  to  a  person  residing  in  another  part  of  the 
country.  He  will  make  a  deposit,  or  in  some  manner  cre- 
ate a  $50  fund  in  the  hands  of  a  company  or  department 
of  Government  whose  business  it  is  to  transfer  funds.  The 
fund  having  been  created,  the  company  or  department  will 
issue  an  order  for  the  amount,  payable  to  the  person  speci- 


INSTRUMENTS   OP   TRANSFER 


67 


The  letter 
of  credit. 


fied.  This  will  be  sent  instead  of  money  or  other  forms 
of  funds.  Money-orders  are  issued  by  express  companies, 
the  Bankers'  Money-Order  Association,  and  the  Post-Office. 
A  photo-engraved  copy 
of  an  Adams  Express 
Company  order  is  exhib- 
ited on  page  68. 

One  may  wish  to 
travel  in  a  foreign  land 
— let  us  assume  the  esti- 
mated cost  to  be  $1,000. 
It  may  not 
be  conve- 
nient or  safe 

to  carry  money  enough 
to  pay  the  expenses  of 
the  entire  trip.  For  this 
reason  some  form  of 
credit  is  preferable  to 
money.  With  this  in 
view,  the  prospective 
traveler  goes  to  his  bank- 
er. He  arranges  at  the 
bank  for  a  special  credit 
fund  of  $1,000  to  be 
drawn  against  at  any 
time.  But  banks  and 
business  houses  abroad 
will  not  accept  a  "cus- 
tomer's check  "  against 
an  American  bank.  A 
"Letter  of  Credit"  is 
therefore  issued.  The 
ordinary  letter  of  credit  is  really  a  guarantee  of  payment  of 
all  "  customer's  checks  "  or  drafts  drawn  by  the  holder  to 
the  amount  stated  in  the  letter.  It  is  a  "  certified -account " 


68 


WHAT  ARE  FUNDS! 


instead  of  a  "  certified-check."  It  has  its  advantages  over 
a  certified-check  in  that  it  allows  the  customer  to  draw  just 
the  amount  needed  at  any  time  or  place,  and,  upon  identi- 
fication, to  have  his  check  cashed  in  the  same  manner  as  a 
certified-check  or  a  cashier's  check.  With  the  increase  of 
foreign  travel  the  letter  of  credit  has  become  such  a  com- 
mon instrument  for  the  transfer  of  credit  funds  that  every 
one  should  be  familiar  with  its  form  and  purpose.  We 
reproduce  on  pages  09  and  70  a  facsimile  of  the  first  and 
second  pages  of  a  letter  of  credit  for  £100  ($500).  The  first 
page  is  the  letter  guaranteeing  the  account,  authorizing  the 
various  correspondents  of  the  bank  issuing  it,  or  any  other 


fltfrftfofll > 


banker  to  whom  the  letter  may  be  presented,  to  pay  to  the 
holder  any  amount  for  which  he  may  draw  not  to  exceed  the 
fund  provided.  In  order  that  the  fund  may  not  be  over- 
drawn, a  second  page  is  provided  upon  which  are  entered 
the  amounts  drawn.  These  entries  are  made  by  the  bank 
officer  himself  at  the  time  that  the  draft  is  paid,  and  give  a 
complete  account  of  the  fund.  The  entries  give  the  names 
of  the  banks  to  which  the  letter  is  presented,  the  place,  and 
the  amount  paid  by  each.  On  the  third  page  is  the  "  Indica- 
tion List " — i.  e.,  the  names  of  the  bank's  correspondents 
where  drafts  will  be  honored.  The  customer  is  not,  in  fact, 
limited  to  the  correspondents  of  the  bank  issuing  the  letter, 
as  the  draft  will  be  accepted  at  any  place  where  the  bank 


INSTRUMENTS  OF  TRANSFER 


69 


of  issue  will  be  given  credit.  As  a  matter  of  safety  and  of 
greater  ease  in  identification,  the  banker  issuing  the  letter 
requires  the  one  to  whom  it  is  issued  to  place  his  signature 
on  the  face  of  the  letter  itself.  He  also  takes  a  number  of 


,/,„/,„•„•/.„.„  ,/.;„„„./  ,/,.,/t^,   ;/ -,„ 

///  /,/,/ ,/  //, ,  /;// '"',','," fi*j&',''', I. ".";,/.  "/,"','•„/ 

.,//,„/,',„  .         '//.,.,      /.//..•      ,/„//,/,,/'//,       ,,,,,.://,,/.,,„/„//,„/,,./ 

/://,,/,„„/</,„//./,.,.,,,  ^ 

./'/., '&,///,.,///,.     ,/,,//,/.,, 

^  w'z/^ |3 

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/ 

./,_  //;.,,„„,.,  ^ 

//Hi,//,,ly.    ,/  //,,  ,  '_/,//.   ,./<'.  «•  '^'  • 


other  signatures  on  blanks  specially  prepared  for  that  pur- 
pose, and  sends  one  to  each  of  the  leading  foreign  bankers 
drawn  upon.  In  course  of  travel  or  business  the  holder 
presents  his  letter  at  one  of  the  banks  named  on  the  "  Indi- 


70 


WHAT  ARE  FUNDS! 


cation  List";   thereupon  the  cashier  will  ask  him,  in  his 
presence,  to  sign   a  draft  for  the  amount  desired.     After 


i~=^-    """•"""      •  •  "••""'••"  - 

1  25  AM.  l9(ftP»IO  VI  »ORS»1,  lURJES  4  C'  PARIS 

'' '  8  WY.sf  MOWN,  SttlPLEY  &  C8.  LOKDOK, 

VH  EEOTHEES&Ca.PHILABELrHIfl, 


I 


comparing  the  signatures,  the  cashier  will  enter  the  amount 
of  the  draft  on  the  second  page  of  the  letter,  and  return  the 
letter  with  the  money  drawn  to  the  payee.  Payment  is 
usually  made  upon  the  simple  identification  of  comparison 
of  signatures.  Should  the  traveler  lose  his  letter  of  credit, 
he  will  at  once  notify  the  banks  upon  and  by  whom  it  io 
drawn. 


Another  instrument  of  transfer  of  credit  funds  for  use 
in  travel  has  been  devised  by  the  express  companies.  This 
is  most  extensively  used  by  the  American  Ex- 
press Company,  which  has  offices  all  over  Eu- 
rope. Over  10,000  agents  are  authorized  to 
pay  these  checks.  The  ease  with  which  they  may  be  re- 
deemed causes  them  to  be  received  by  hotels,  railroads,  and 


The  "  travel 
er's  check" 


INSTRUMENTS  OF  TRANSFER 


71 


business  houses  about  as  readily  as  the  money  of  the  coun- 
try. They  are  issued  to  the  traveler  in  denominations  of 
$10,  $20,  $50, 
$100,  and  $200, 
to  suit  the  con- 
venience of  the 
purchaser. 
When  issued, 
they  are  bound 
into  a  small 
check-book, 
and  may  be  car- 
ried about  as  or- 
dinary checkp 
Pr  e  caution 
against  loss  and 
for  identifica- 
tion of  the 
holder  of  a  trav- 
eler's check  is 
provided  by 
having  the  pur- 
chaser sign  his 
name  in  the  up- 
per left  -  hand 
corner  at  the 
time  of  issue. 
Whenthecheck 
is  presented  for 
payment  he  is 
again  required 
to  sign  his  name 
on  the  lower 
left  -  hand  cor- 
ner. The  sig-  ~ 
natures  must  agree 


The  success  of  the  American  Express 


72 


WHAT  ARE  FUNDS! 


Company  has  led  other  foreign  exchange  houses  to  issue 
travelers'  checks.     A  notable  example  is   that  issued  by 


Brown  Brothers.  This  house,  with  its  international  con- 
nections and  long-standing  reputation  for  honorable  deal- 
ing, has  an  established  credit  which  will  be  taken  in  trade 
anywhere  in  the  commercial  world.  Its  checks  have  the 
advantage  of  being  more  difficult  to  forge.  Instead  of 
having  both  signatures  of  the  customer  written  on  the  face 
of  the  instrument,  where  one  will  serve  as  a  copy  for  the 
other,  the  one  selling  the  check  to  a  foreign  house  must  in- 
dorse his  signature  on  the  back.  The  cashier  may  then  fold 
the  paper  in  such  a  manner  that  the  writing  may  be  com- 
pared, as  shown  in  the  accompanying  cut.  It  will  be  noted 
that  on  the  face  of  the  check  is  indicated  its  money  equiva- 
lent, or  exchange  value,  in  each  country  where  it  may  be 
used.  Another  house  prominent  in  international  exchanges 
which  has  adopted  this  method  of  securing  patronage  from 
serving  the  foreign  traveler  is  Knauth  Nachod  &  Kiihne. 
It  will  be  n  ticed  by  reference  to  the  exhibit  on  page  73 
that  their  check  is,  in  form,  almost  identical  with  that  of 
the  American  Express  Company. 


INSTRUMENTS  OP  TRANSFER 


73 


The  money  -order  business  of  the  country  is  enormous. 
As  shown  by  the  report  of  the  Postmaster-General,  the 

business  done  by  the  postal  money-order  de- 
'changeabie  partment,  in  1901,  was  $274,500,000,  while  the 
bank  money-  same  class  of  business  transacted  by  the  express 

companies  is  estimated  at  $150,000,000  per  year. 
"With  an  aggregate  of  sales  of  money-orders  amounting  to 
$425,000,000  per  year  ($1,400,000  per  day),  the  popularity 
of  the  traveler's  check  suggested  that  by  use  of  an  inter- 
changeable money-order  the  banks  could  handle  a  large  part 
of  a  business  which  produces  in  fees  about  $3,300,000  per 
year.  Mr.  Percival  Kiilme,  of  Knauth  Nachod  &  Kiihne, 
was  among  the  first  to  recognize  this  opportunity.  Calling 


together  the  secretaries  of  the  various  State  bankers'  associ- 
ations, a  bankers'  money-order  association  was  organized, 
with  Mr.  Kiihne  as  its  president.  The  avowed  object  of  the 
association  is  to  compete  for  the  enormous  money-order 
business,  by  allowing  every  bank  which  becomes  a  member 
of  the  association  to  issue  interchangeable  certificates.  The 
Western  National  Bank  of  New  York  acts  as  a  clearing- 
house for  the  other  members.  In  other  words,  the  order  is 
in  the  form  of  New  York  exchange  which  will  be  accepted 
anywhere  in  the  country.  The  banks  are  in  a  position  of 


74  WHAT  ARE  FUNDSt 

advantage  over  the  express  companies,  for  the  reason  that 
the  public  is  accustomed  to  dealing  with  the  banks,  and  will 
find  it  an  added  convenience  to  purchase  money-orders  there. 


(Lhr  tMiifcm;  fljuiirp  (l)riUT  Xssimatiun.  N° 

T«  ««»,«  «r  ~.,  MONEY  K.DIR  r. sT,t.  .tccn,.  .,  ,.c  «.»,»«.  — —      '•— 


The  promotion  and  capitalization  of  the  United  States 
Steel  Corporation  furnished  the  leading  sensation  of  the 
Place  of  opening  year  of  the  new  century.  The  prin- 
credit  in  cipal  dramatic  feature,  however,  was  not  its 
'^finance  magnitude,— other  concerns  of  large  proportions 

had  been  developed, — it  was  the  suddenness  of 
its  rise.  Within  a  few  months  scattered  and  isolated  plants 
were  reorganized  financially,  and  grouped  under  wider 
and  still  wider  management,  until  finally,  with  a  rapidity 
that  fairly  staggered  the  world,  all  concerns  were  absorbed 
by  one  gigantic  corporation — a  billion-dollar  "  trust "  was 
formed.  Under  a  system  of  finance  more  primitive  than 
our  own  this  would  not  have  been  possible.  The  develop- 
ment of  our  whole  modern  system  of  economy  lay  back  of 
it ;  the  growth  of  great  financial  institutions  was  a  neces- 
sary prerequisite.  Let  us  suppose,  for  example,  that  we 
had  lived  in  an  age  of  strictly  money  economy ;  let  us 
assume  that  it  had  been  necessary  to  deliver  coin  to  the 
amount  involved  in  the  transaction.  If  silver  dollars  had 
been  used  it  would  have  taken  one  man  fully  five  years  to 
count  out  the  change  with  business  accuracy ;  five-dollar  gold 
pieces  would  have  shortened  the  process  four  years,  but  still 
a  year  would  not  have  been  too  long  a  time.  Under  a 
money  economy,  this  one  necessity— the  difficulty  of  count- 


INSTRUMENTS  OP  TRANSFER  75 

ing  and  making  change — would  preclude,  absolutely,  the 
large  transaction  of  to-day.  By  the  use  of  modern  devices, 
the  effort  involved  in  this  element  of  business  is  reduced  to 
a  minimum  ;  a  transfer  of  any  size  may  be  made  by  a  simple 
stroke  of  the  pen.  Using  more  primitive  methods  than  at 
present  prevail,  the  process  of  accounting  necessary  to  a 
consolidation  such  as  that  above  referred  to  would  have 
employed  an  army  of  men  for  months.  Modern  financial 
devices,  modern  financial  institutions,  modern  systems  of 
accounting,  make  the  transferring  of  large  interests  a  matter 
of  a  few  moments.  The  settlement  and  adjustment  of  con- 
stantly changing  business  relations  are  quickly  effected. 
The  process  of  "  clearing,"  for  example,  allows  the  financial 
interests  of  the  whole  continent  to  be  adjusted  weekly.  By 
modern  financial  institutions,  and  modern  methods  of  com- 
munication, the  world's  business  may  be  brought  into  daily 
contact  and  adjustment,  if  need  be.  In  New  York,  busi- 
ness to  the  amount  of  $150,000,000  per  day  is  transacted 
and  settled  by  the  actual  exchange  of  about  $6,000,000  in 
coin.  Between  London  and  New  York,  business  of  some- 
thing like  $3,000,000,000  is  kept  in  constant  adjustment 
with  the  transfer  of  only  about  $150,000,000  in  gold,  and 
a  large  part  of  this  is  shipped  for  manufacturing  purposes. 
Even  a  country  store  doing  a  $20,000  business,  by  modern 
economy  is  able  to  effect  its  exchanges,  serve  its  customers, 
and  settle  its  accounts  in  various  parts  of  the  world  with 
the  actual  use  of  only  $500.  With  a  metal  reserve  worth 
a  few  billion  dollars,  held  for  safe-keeping  in  the  vaults  of 
the  large  cities — and  with  this  reserve  practically  undis- 
turbed— the  commercial  world  is  enabled  to  do  its  business 
without  the  use  of  any  considerable  amount  of  money-metal. 
Communities  and  nations  are  bound  together  by  such  finan- 
cial and  commercial  ties  that  the  merchant  or  the  farmer 
in  western  Colorado  or  South  Africa  may  purchase  goods 
in  Hongkong,  New  York,  or  Amsterdam  without  offering 
a  grain  of  gold  or  silver  in  exchange,  and  with  no  greater 


76  WHAT  ARE  FUNDS! 

inconvenience  than  that  of  going  to  his  local  financial  agent. 
Whether  it  be  the  organization  and  capitalization  of  a  billion- 
dollar  corporation  or  the  purchase  of  a  spool  of  thread,  the 
same  commercial  solvent  is  applied,  the  same  instrument  of 
economy  is  employed.  It  is  the  use  of  a  universal  system 
of  credit  that  distinguishes  the  business  methods  of  the  New 
World  from  the  Old. 


PART  II 
HOW  FUNDS  ARE   OBTAINED 


CHAPTER  V 
FUNDS  OBTAINED   BY  GIFT  AND  INHERITANCE 

IT  has  been  observed  by  writers  that  exchange  did  not 
exist  among  the  most  primitive  people.  This  may  not  seem 
Primitive  strange  when  we  take  into  account  the  chief 
economy—  motives  for  their  association.  The  family,  per- 
The  family.  j^p^  represents  the  most  primitive  group,  but 
its  purpose  is  not  industrial ;  its  bond  of  union  is  found  in 
tfie  instinct  of  love ;  its  race  purpose  is  the  propagation  of 
kind ;  its  plan  of  organization  is  one  of  cooperation  for 
mutual  comfort  and  for  the  rearing  of  children.  To  the 
family,  industry  is  incidental  rather  than  an  organic  prin- 
ciple. Its  cooperation  is  based  on  the  sacrifice  of  self-in- 
terest—on the  devotion  of  the  substance  and  energy  of 
ancestors  and  adult  members  to  the  young  and  to  the  com- 
fort of  one  another.  As  between  members  of  such  a  group 
the  necessities  of  life  do  not  admit  of  commercial  exchange 
without  impairing  the  bond  of  sympathy  and  harmony 
which  draws  the  members  together  and  holds  them  in 
domestic  relations.  When,  within  the  family,  commercialism 
comes  to  be  a  dominant  motive,  when  self-sacrifice  and 
mutual  devotion  are  relegated  to  a  subordinate  place,  the 
family  group  itself  breaks  down — its  component  members 
attach  themselves  instead  to  commercial  and  industrial  con- 
cerns, and  the  family  organization  is  lost.  Within  the  fami- 
ly, "  gift "  is  the  prevailing  method  of  obtaining  the  means 
necessary  to  comfort  and  enjoyment. 

79 


80  HOW  FUNDS  ARE  OBTAINED 

A  larger  and  broader  association  is  developed.  From 
motives  of  mutual  aid  families  group  themselves  into  clans 
and  tribes ;  but  in  this,  as  well,  industry  is  not 
the  dominant  interest.  Mutual  protection  is 
the  tie  that  binds.  Security  against  external 
foes  and  internal  dissensions  is  found  necessary  to  the  high- 
est welfare  of  all.  Within  this  larger  group  public  welfare 
forms  the  dominant  principle  of  organization ;  but  the  race 
advantages  of  a  smaller  group  for  the  propagation  of  kind 
(the  family)  cause  it  to  persist  within  the  tribe ;  this  still 
remains  the  unit  for  the  care  of  the  young,  the  unit  of  co- 
operation in  ministration  to  want,  of  common  devotion  to 
the  comfort  and  enjoyment  of  its  members.  Both  princi- 
ples, however,  being  essential  to  the  race,  the  clan  or  tribe 
(based  upon  the  principle  of  protection),  and  the  family 
(based  upon  the  principle  of  common  devotion),  are  brought 
into  harmony  one  with  the  other.  The  protection  secured 
by  political  organization  gives  more  favorable  conditions  to 
the  family, — conditions  better  adapted  to  the  highest  devel- 
opment of  the  individual  members  of  the  race ;  the  social 
training  within  the  family,  the  authority  exercised,  the 
order  established  and  maintained  among  its  members,  better 
fit  them  for  the  broader  tribal  relations.  In  the  family 
group  the  various  dependent  members  are  supported  by 
"  contributions  "  of  those  in  control ;  with  the  larger  politi- 
cal group  those  in  control  are  supported  by  "contribu- 
tions "  of  their  dependents. 

Other  groups  may  be  cited  in  which  exchange  is  not 
necessary  to  harmonious  and  eifective  cooperation  ;  but 
Other  non-  t^ese>  ^  should  be  observed,  are  also  non-indus- 
industrial  trial  in  character.  The  Church,  the  club,  so- 
cieties— religious,  educational,  fraternal,  and 
social,  of  which  many  might  be  enumerated — have  for  their 
dominant  principle  interests  that  are  non-industrial.  Each 
of  them  is  dependent  upon  an  industrial  group  for  main- 
tenance and  support.  Each  of  them  has  a  significance  in 


FUNDS  OBTAINED  BY  GIFT  AND  INHERITANCE      81 

industrial  development,  and  to  each,  industrial  cooperation 
is  essential.  These  social  groups  have  a  bearing  upon  our 
subject,  in  that  they  strengthen  the  bonds  of  association, 
and  in  their  purpose  give  direction  and  character  to  the 
organization  of  industry.  Being  non -industrial,  however, 
without  independent  income  for  their  support,  a  large  part 
of  their  "  maintenance  "  must  come  from  "  gift,"  or  some 
other  form  of  "  contribution,"  as  distinguished  from  "  ex- 
change." 

It  is  out  of  a  condition  of  industrial  "  dependence  "  that 
"  gift  "  and  "  contribution  "  arise ;  as  before  suggested,  it  is 

with  this  method  of  obtaining  funds  that  we 
funding  ie  Crs*  become  acquainted.  The  helplessness  of 
method  of  the  child,  the  necessity  for  care  and  protection 

during  that  period  of  life  when  he  is  attaining 
strength  and  vigor,  throws  on  the  parent  the  duty  and  ne- 
cessity of  providing  for  his  maintenance.  In  primitive 
societies  both  males  and  females  are  industrial.  With  the 
development  of  art  and  invention  and  the  means  of  supp^y- 
ing  want  in  greater  abundance,  the  father  becomes  the 
directing  agent  of  productive  enterprise,  while  to  the 
mother  is  given  over  the  care  and  training  of  the  child. 
This  increases  the  number  of  dependents;  to  the  infant 
dependent  class  is  added  the  adult  females  of  the  family ; 
and  with  the  increase  in  the  number  of  dependent  members 
arises  an  increased  necessity  for  contribution  by  "  gift." 
As  civilization  advances,  as  the  period  of  training  lengthens, 
the  period  of  dependence  also  grows.  Children  get  their 
first  spending  money  from  the  hands  of  their  parents ;  as 
they  grow  to  maturity,  that  instinct  which  is  so  necessary 
to  the  maintenance  of  the  child  during  his  infancy  follows 
the  ancestor ;  the  interest  which  the  parent  feels  in  the 
development  of  his  offspring  is  consideration  sufficient  to 
cause  him  still  to  extend  the  means  necessary  to  mainte- 
nance and  comfort.  This  first  goes  out  in  the  form  of  pro- 
viding training  which  would  better  fit  the  youth  to  move 


82  HOW  FUNDS  ARE  OBTAINED 

and  act  with  his  fellows  in  the  varied  circles  of  life.  In 
this  the  aim  of  parents  is  so  to  equip  their  offspring  that 
they  may  enter  into  the  complex  relations  of  life  capable  of 
making  judgments  and  of  understanding  the  conditions 
necessary  to  highest  success.  Their  hope  and  their  aim  are 
to  raise  the  young,  through  a  longer  period  of  dependence, 
to  a  place  of  highest  independence.  This  preparation,  from 
the  beginning,  involves  the  use  of  funds,  but  in  most  cases 
the  experience  of  the  young  is  limited  to  the  one  way  of 
acquiring  them — viz.,  voluntary  contribution. 

Where  "  exchange  "  becomes  established  as  an  essential 
part  of  industrial  economy,  "  contribution  "  necessarily  takes 
the  form  of  "  funds  "  as  the  more  effective  means  of  grant- 
ing support.  Mother,  child,  missionary,  priest,  church  or- 
ganization, social  or  fraternal  society — every  person,  or  non- 
industrial  institution,  that  holds  a  position  of 
^Contribution  dependence,  must  look  to  the  gifts  and  other 
usually  lake  forms  of  contribution  of  those  in  control  of  in- 
" '* funds'"0^  dustrial  income  for  their  means  of  support ; 
they  must  rely  upon  the  strength  of  the  "ties 
that  bind  "  the  possessors  of  funds,  upon  their  regard  for 
kin,  their  desire  for  social  advancement,  or  their  response 
to  ideals  of  higher  civilization  and  progress,  as  a  basis  for 
their  claims. 

Inheritance  is  simply  one  form  of  acquisition  by 
"gift."  It  rests  on  the  assumption  that  the  properties 
acquired  by  the  ancestor,  which  he  himself  does  not  use 
during  his  life,  and  which  are  not  disposed  of  to  others 
during  his  life,  are  intended  to  be  given  to 
obtained  by  ^8  neirs-  The  child,  during  his  minority,  has 
'•  inherit-  been  a  dependent ;  for  his  support  he  has  re- 
lied upon  gifts.  When  he  has  reached  his 
maturity,  the  same  interest  and  regard  which  caused  the 
father  to  give  support  and  provide  social  and  educational 
advantages,  suggest  the  propriety  of  giving  the  boy  his 
"  start "  in  the  business  world.  He  recognizes  the  ad- 


FUNDS  OBTAINED  BY  GIFT  AND  INHERITANCE       83 

vantage  of  capital  for  business — of  initial  funds  for  the 
organization  and  management  of  industry.  He  knows  that 
without  some  contribution  of  this  kind  his  son  for  years  will 
be  unable  to  exercise  his  highest  talents  in  the  enterprise 
which  he  has  undertaken  as  a  life  work.  Funds  are  therefore 
provided  by  the  parent  for  the  business  activity  of  the  son, 
as  they  have  been  given  before  for  support.  With  the  family 
as  a  unit  in  social  organization,  with  the  law  of  property  as 
the  underlying  industrial  principle,  inheritance  passes  into 
our  system  as  a  part  of  the  law  governing  our  institutional 
and  social  life.  It  is  assumed  that  the  ancestor,  unless  he 
otherwise  bequeaths  his  property  during  his  life,  would  have 
divided  it  among  those  dependent  upon  him  at  his  death; 
that  it  is  in  their  interest  and  for  their  welfare  that  he  has 
put  forth  the  effort  to  obtain  the  funds  and  properties 
which  he  possesses,  and  that  this  advantage  would  be  pre- 
served to  the  members  of  the  family  were  his  will  ex- 
pressed in  a  formal  act.  An  acceptance  of  the  principle  of 
"  trusteeship"  however,  as  laid  down  by  Mr.  Carnegie  in 
his  Gospel  of  Wealth,  would  give  quite  a  new  applica- 
tion to  the  law  of  inheritance.  Mr.  Carnegie  says  that  the 
acquisition  of  wealth  is  the  result  of  a  great  cooperative 
process  in  which  the  whole  society  of  workers  (dependents 
as  well  as  non-dependents)  take  part ;  that  for  the  purposes 
of  carrying  on  this  process  to  the  highest  advantage  of  all, 
some  must  give  direction  while  others  must  attend  to  the 
minute  details.  Each  and  all,  however,  have  assisted  in  the 
production  of  the  means  of  enjoyment.  While  coopera- 
tion is  advantageous  for  the  purposes  of  producing  the 
means  of  enjoyment,  it  is  only  by  distributing  this  to  the 
individual  members  that  the  means  may  be  enjoyed — i.  e., 
the  means,  thus  produced,  must  be  applied  to  a  use  which 
will  give  satisfaction  to  individual  want,  and  this  can  best 
be  determined  by  each  member  for  himself.  Or,  to  put  it 
in  another  way :  while  there  is  advantage  in  cooperation, 
the  principle  of  personal  freedom  requires  that  this  cooper- 
7 


84  HOW  FUNDS  ARE  OBTAINED 

ation  must  be  voluntary,  and  botli  the  product  to  be  used 
and  the  use  to  be  made  of  the  product  must  be  determined 
by  the  individual  who  feels  the  want.  No  man  shall  be  a 
slave.  As  a  means  of  securing  personal  freedom  and  at 
the  same  time  of  obtaining  the  benefits  of  cooperation,  the 
amount  to  be  distributed  to  each  as  a  return  for  cooperation 
must  be  left  to  a  previous  arrangement.  Now,  as  Mr.  Car- 
negie reasons,  if  under  these  arrangements  or  contracts  of 
free  cooperation  the  managers  and  directors  have  left  to 
them  a  large  surplus — a  surplus  disproportionate  to  their 
service,  and  disproportionate  to  their  own  needs  and  the 
needs  of  those  dependent  upon  them, — then  these  men  should 
consider  that  they  hold  this  surplus  as  a  fund  "  in  trust  "  for 
the  whole  society.  To  quote  the  words  of  this  great  direct- 
or of  cooperative  industry,  whose  feeling  goes  out  toward 
his  fellows,  and  who  with  his  enormous  wealth  has  taken  a 
large  social  view  of  his  responsibility,  it  is  the  duty  of  the 
man  of  wealth  "  to  set  an  example  of  modest,  unostentatious 
living,  shunning  display  or  extravagance ;  to  provide  mod- 
erately for  the  legitimate  wants  of  those  dependent,  upon 
him ;  and,  after  doing  so,  to  consider  all  surplus  revenues 
which  c,ome  to  him  simply  as  trust  funds,  which  he  is  called 
upon  to  administer  in  a  manner  which,  in  his  judgment,  is 
best  calculated  to  produce  the  most  beneficial  results  to  the 
community — the  man  of  wealth  thus  becoming  the  mere 
trustee  and  agent  for  his  poorer  brethren,  bringing  to  their 
service  his  superior  wisdom,  experience,  and  ability  to  ad- 
minister." The  application  of  the  principle  of  trusteeship  to 
the  law  of  inheritance  would  very  much  enlarge  the  respon- 
sibility of  the  man  of  wealth.  If  accepted  by  the  ruling 
majority  of  our  people,  the  man  in  control  of  affairs  would 
be  regarded  very  much  in  the  light  of  the  manager  of  a  large 
corporation  in  which  the  whole  country  were  stockholders. 
Each  one  who  labors  in  the  common  cause  labors  for  an 
agreed  salary  or  wage  under  the  manager;  the  managers  or 
directors  are  also  entitled  to  vote  for  themselves  a  fair  com- 


FUNDS  OBTAINED  BY  GIFT  AND  INHERITANCE      85 

pensation — a  competence  with  which  to  care  for  those  de- 
pendent upon  them  ;  these  salaries,  wages,  and  deductions 
should  be  considered  in  the  nature  of  expense  of  operation ; 
net  earnings,  however,  belong  to  the  whole  corporation  ; 
they  should  be  considered  as  a  fund  in  the  hands  of  the 
manager  for  distribution  according  to  the  obligations  of 
the  corporation  to  society,  and  are  not  for  the  benefit  of  its 
directors.  On  dissolution,  the  full  assets  of  the  company 
should  be  converted  and  distributed  to  the  community  as  its 
stockholders. 

The  importance  of  the  principle  of  inheritance,  however 
applied,  can  not  be  overlooked.  For  the  dependent — the 
,  ...  recipient  of  funds  obtained  from  ancestral  con- 
impoHance  tribution — an  inheritance  often  obviates  the  ne- 
of  gift  fid  Cessity  of  securing  capital  equipment  by  means 
of  a  long  process  of  accumuTation  (or  saving) 
out  of  earnings ;  it  shortens  the  time  necessary  to  acquire  a 
fund  sufficient  to  equip  any  business  enterprise  to  be  under- 
taken. It  increases  the  opportunity  and  advantage  of 
those  members  of  the  community  who,  having  been  well 
supplied  with  funds,  have  had  opportunity  to  avail  them- 
selves of  the  highest  training,  and  who  may  therefore  be 
best  able  to  give  direction  and  control  to  the  affairs  of  the 
community.  This  advantage,  however,  may  be  lost.  Op- 
portunities may  be  wasted  ;  absence  of  necessity  may  re- 
move the  stimulus  to  effort  which  is  essential  to  the  devel- 
opment of  cooperative  industrial  capability.  The  one  to 
whom  capital  has  passed  by  "  gift "  or  "  inheritance  "  may 
show  himself  unable  to  utilize  capital  to  advantage.  In 
such  cases,  by  the  very  contest  into  which  the  business  man 
is  ever  thrown  and  in  which  capital  itself  must  be  employed 
in  order  to  become  productive  and  return  to  its  possessor  an 
income  for  support,  the  properties  of  the  incompetent  pass 
over  and  become  subject  to  the  control  of  those  who  can 
use  them  to  higher  advantage.  But  when  large  productive 
estates  or  interests  descend  to  those  who  have  not  a  proper 


86  HOW  FUNDS  ARE  OBTAINED 

appreciation  of  their  responsibility,  or  who  have  not  the 
ability  or  energy  to  give  the  best  direction  to  their  use ; 
when,  by  incompetence  or  waste,  productive  properties 
finally  pass  over  to  the  control  of  those  who  are  "  not  fit," 
there  is  a  loss  to  the  whole  society,  not  only  from  the 
"  waste "  of  the  wealth  which  has  come  into  the  hands  of 
the  socially  unfaithful,  but  by  the  "  waste  "  of  social  force 
which  comes  from  the  disorganization  and  displacement 
occasioned  by  the  breaking  up  of  one  scheme  of  cooperation 
and  the  readjustment  and  reorganization  made  necessary  by 
the  new. 

The  law  of  inheritance  is  a  rule  which  has  grown  out  of 
the  common  impulse  to  care  for  and  support  dependents ; 

this  impulse  was  evolved  at  a  time  when  the 
inheritance,  producing  power  of  a  group  did  not  more  than 

suffice  for  support  of  its  members — when  the 
family  was  the  all-important  race  factor.  It  is  an  expres- 
sion of  the  common  experience  and  common  motive  of  the 
race  directed  toward  its  own  perpetuation.  Before  the  death 
of  the  ancestor  all  property  acquired  during  life  "  belonged" 
to  him  ;  by  operation  of  the  law  of  inheritance  the  property 
of  the  ancestor  passed  to  his  natural  heirs  according  to  an 
established  rule  of  descent,  unless  the  common  law  or  rule  is 
varied  or  set  aside  by  a  formal  expression  of  the  "  will "  of 
the  ancestor,  in  which  case  "  the  last  will  and  testament " 
governed.  The  formal  expression  of  the  decedent's  "  will " 
is  known  as  a  "  devise,"  and  the  property  or  funds  inherited 
in  this  way  are  said  to  be  "  devised" — i.  e.,  they  are  passed  on 
by  him  to  others  in  the  same  manner  as  if  he  had  disposed 
of  them  during  his  life.  Laws  controlling  inheritance  are 
necessary  and  wholesome.  Laws  controlling  inheritance, 
however,  may  have  the  effect  of  protecting  the  use  of  funds 
and  properties  in  the  hands  of  the  incompetent.  Where  such 
laws  exist,  the  effect  is  to  change  the  relation  of  dependence 
from  one  based  on  social  welfare  to  one  carrying  with  it  social 
degeneration.  Industrial  dependence  which  is  found  to  exist 


FUNDS  OBTAINED  BY  GIFT  AND  INHERITANCE      87 

between  members  of  a  family,  and  which  is  incident  to  the 
maintenance  of  the  church,  to  the  support  of  fraternal  and 
social  organization,  is  the  result  of  the  sacrifice  of  a  lower 
to  a  higher  interest.  The  perpetuation  of  race  in  greatest 
strength  and  vigor,  the  fostering  of  social  and  educational 
ideals,  mutual  protection  and  general  welfare,  are  as  neces- 
sary to  a  people  as  is  physical  maintenance  and  support. 
To  this  end  many  persons  in  our  society  have  accepted 
places  of  industrial  dependence  in  their  devotion  to  higher 
interests.  For  this  reason  it  is  held  by  many  of  the  great 
social  and  industrial  leaders  of  to-day  that  those  who  are 
engaged  in  control  of  the  industrial  or  business  pursuits, 
and  into  whose  hands  the  properties  and  incomes  of  the  in- 
dustrial society  couie  for  distribution,  must  be  regarded  as 
holding  them  "  in  trust "  for  all  the  members  wTho  are  de- 
voting their  lives  to  common  well-being.  Laws  of  gift  and 
inheritance  which  stand  in  the  way  of  such  a  distribution  as 
will  further  this  interest,  which  condone  "breaches  of  trust" 
— laws  which  have  been  developed  from  ideals  of  private 
monopoly,  and  which  have  come  down  from  those  legal  sys- 
tems in  which  "arbitrary  power"  took  the  place  of  the  more 
modern  notion  of  free  cooperation  based  on  "  general  wel- 
fare"— are  constantly  the  subject  of  legislative  modification 
and  political  interest.  Many  changes  have  already  been 
made,  notable  among  them  the  abolition  of  the  rule  of  primo- 
geniture. It  remains  only  for  the  great  political  society  to 
determine  in  this,  as  in  all  other  matters  of  public  interest, 
what  rules  of  social  cooperation  they  shall  establish. 

FUNDS   OBTAINED    BY    "  APPROPRIATION  " 

The  idea  of  appropriation  is  one  quite  different  from 
that  of  gift.  As  before  observed,  gift  is  based  on  relations 
of  industrial  dependence.  "  Appropriation,"  on  the  other 
hand,  proceeds  from  a  notion  of  superiority  or  control.  It 
is  the  method  commonly  employed  by  government  as  a 
means  of  obtaining  funds  for  its  support.  It  is  the  method 


88  HOW  FUNDS  ARE  OBTAINED 

commonly  employed  by  those  engaged  in  many  forms  of 
industrial  pursuit  for  obtaining  those  things  from  nature 
which  will  be  useful  to  mankind  but  which  have  not  yet 
been  reduced  to  the  control  of  others.  Man  has  certain 
wants  which  he  would  supply.  Around  him  is  nature  en- 
dowed with  all  the  materials  which  are  necessary  to  the 
satisfaction  of  want.  To  make  these  materials  available  to 
this  end,  however,  they  must  be  "  appropriated  " ;  the  ore 
must  be  extracted  from  the  mine,  fish  must  be  taken  from 
the  sea,  the  timber  of  the  forest  must  be  reduced  to  owner- 
ship in  forms  wThich  will  be  useful  for  supplying  human 
"  Appropria-  needs.  In  primitive  times  among  a  primitive 

hon"aprim-  fishing  people,    when   dried   fish  was  used   as 

itive  method  ,       .     \.    .  ,  f   ^ 

of  obtaining     money,  the  individuals  of  the  community  pro- 

funds.  cured  their  funds  by  means  of  appropriation. 

Among  a  hunting  people,  skins  of  beaver  and  mink  or  the 
hides  of  other  animals  which  served  as  money  were  pro- 
cured in  the  same  way.  Among  a  primitive  agricultural 
people  wheat  and  barley  served  the  members  of  the  tribe 
for  funds,  and  under  a  primitive  industrial  regime  the  met- 
als obtained  by  the  various  members  of  the  tribe  or  clan 
were  passed  from  hand  to  hand  as  money,  with  no  common 
stamp,  design,  or  official  voucher  for  weight  or  fineness  such 
as  is  known  to  our  modern  systems  of  finance.  When,  how- 
ever, commerce  and  industry  developed  to  such  an  extent 
that  more  careful  judgments  and  closer  estimates  of  value 
were  made  in  exchange ;  when  the  uncertainty  of  weight 
and  fineness  of  the  coins  or  metals  used  came  to  be  an  ob- 
struction to  commercial  and  industrial  progress ;  when  by 
common  consent  some  uniform  standard  of  judgment  was 
demanded  in  trade,  and  the  coinage  of  money  was  placed  in 
the  hands  of  a  central  agency  of  government  which  would 
give  it  character  and  undoubted  integrity,  then  appropria- 
tion as  a  means  of  obtaining  funds  was  abandoned.  The 
only  method  other  than  that  above  described  as  pertaining 
to  industrial  dependence,  was  that  of  "  exchange." 


CHAPTER  YI 
FUNDS  OBTAINED  BY  EXCHANGE 

"  EXCHANGE  "  is  the  common  method  of  obtaining  funds 
— the  only  method  that  belongs  properly  within  the  field  of 
business.  A  young  man  may  have  capital  given  to  him  by 
his  father  with  which  to  begin  a  business  career ;  by  "  will " 
or  bequest  he  may  receive  a  certain  amount  of  money  or 
other  funds.  Usually  when  other  property  is  inherited,  this 
will  not  serve  the  purpose  of  the  one  inheriting  it  unless  he 
takes  up  and  carries  on  the  business  of  his  father.  Except 
in  such  cases,  therefore,  he  will  convert  into  funds  the 
property  inherited  and  then  apply  these  to  his  own  uses. 
An  inquiry  into  the  prevailing  financial  methods  of  ob- 
taining funds,  therefore,  is  limited  almost  wholly  to  ex- 
change. The  significance  of  this  fact  is  that  (except  when 
funds  are  received  by  gift)  the  only  way  in  which  a  work- 
ing capital  may  be  obtained  is  by  having  something  to 
sell — one  must  have  something  to  offer,  something  for 
which  others  will  give  money  or  credit  which  may  be  used 
as  funds. 

In  this  appears  the  limitations  of  men  in  their  efforts  to 
secure  capital ;  in  this  may  be  found  the  reason  why  each 

Limit  to  °^  U8  may  not  °^tam  a^  tne  capital  funds  that 
funding  may  be  desired.  Before  we  can  fund  our  en- 
power.  terprise  we  must  have  something  which  those 

possessed  of  funds  will  receive  in  exchange  for  them.  The 
idea  so  often  found  in  the  literature  of  money  and  credit 
that  certain  forms  of  funds  need  have  no  value,  that  they 


90  HOW  FUNDS  ARE  OBTAINED 

may  be  created  by  "  fiat "  of  Government  or  by  the  "  dic- 
tum" of  some  arbitrary  or  influential  person,  is  absolutely 
without  foundation  in  business  experience. 

The  capitalist  of  to-day  is  the  man  who  has  funds  for 

sale;    he   is  a  funds  merchant.     He  sells  his  funds  only 

when  in  his  judgment  he  gets  something  in 

Capitalists.     return  which  wi]1  be  more  vaiuabie  to  him  than 

the  funds  sold.  He  trades  on  precisely  the  same  principle 
as  the  hardware  merchant  or  the  fruit  dealer;  the  only 
diiference  is  that  the  latter  offers  his  wares  for  funds, 
while  the  capitalist  offers  his  funds  for  other  properties — 
usually  for  investments.  One  should  no  more  expect  to 
obtain  capital  funds  without  offering  something  in  return 
than  one  should  expect  to  obtain  groceries  or  clothing  with- 
out giving  a  quid  pro  quo. 

Let  us  suppose  for  a  moment  that  you  were  about  to 
begin  business ;  that  you  had  not  inherited  any  property 
What  may  be  from  ancestors;  that  you  had  received  nothing 
offered  for  by  way  of  gift  with  which  to  "  make  a  start  in 
capital.  life."  How  would  you  proceed  to  raise  the 

funds  necessary  ?  What  would  you  have  to  sell  ?  What 
could  you  offer  to  the  man  of  means — the  capitalist,  the 
funds  merchant  ?  This  question  may  seem  entirely  out- 
side the  field  of  finance.  Not  so.  It  is  here  that  finance 
begins.  It  is  this  beginning  that  takes  thousands  of  men 
and  boys  to  the  workshop. 

SALES  OF  LABOR 

In  going  out  for  employment  laboring  men  are  an- 
swering this  question  in  a  practical  way.  What  have  they 
to  sell  ?  Their  labor ;  their  ability  to  serve  those  who  have 
capital.  Funds  to  them,  as  to  others,  have  a  double  signifi- 
cance :  (1)  The  first  necessity  that  the  laborer  must  face  is 
that  of  maintenance.  His  power  to  serve  others  depends 
on  his  maintaining  himself  in  strength  and  vigor.  His  in- 
come depends  on  continuous  service.  Unless  he  can  so  sus- 


FUNDS  OBTAINED  BY  EXCHANGE  91 

tain  himself  as  to  serve  with  ability  those  to  whom  he  sells 
his  labor,  income  will  cease.  The  first  necessity,  therefore, 
is  for  "  maintenance  funds."  Let  income  fall  below  this 
mark  and  all  possibility  of  industrial  independence  is  gone. 
(2)  The  second  problem  to  be  solved  in  the  funding  scheme 
of  the  laborer  is  so  to  dispose  of  his  services  as  to  leave  a 
surplus  over  and  above  the  expense  of  maintenance — some- 
thing which  may  be  laid  by  as  "  capital  surplus."  It  is  by 
use  of  this  surplus  that  his  industrial  equipment  must  be 
procured.  To  procure  the  capital  funds  necessary  to  equip 
a  business  undertaking  requires  a  long-continued  process  of 
exchanges  of  labor  for  wages,  of  saving  a  surplus,  of  accu- 
mulating this  surplus  into  a  fund  which  will  be  sufficient 
for  his  purpose,  of  expending  it  for  "  investments  "  or  for 
"  betterments."  Assuming  that  you  have  nothing  else  to 
offer,  this  is  the  only  means  possible  by  which  you  may 
procure  capital  for  business. 

Saving  is  the  process  whereby  capital  funds  are  accumu- 
lated from  surplus  earnings.  Capital  funds  acquired  from 
earnings  are  the  remainder  after  the  subtraction 
of  expense  and  recoupment  of  losses.  In  the 
early  part  of  the  last  century,  when  industrial  capital  was 
small,  the  problem  of  saving  was  the  most  important  one 
considered  by  economists  and  writers  on  finance.  At  that 
time  the  problem  was  one  for  the  individual  to  meet  single- 
handed  ;  to-day  large  financial  companies  are  organized  to 
facilitate  saving — to  help  the  laborer  accumulate  a  capital. 
The  small  savings  of  the  many  are  accumulated  into  large 
funds,  which  not  only  serve  as  a  protection  to  the  laborer 
himself,  but  which  in  the  mass  of  accumulations  furnish 
capital  to  large  enterprises  that  give  him  further  employ- 
ment. 

In  this  relation  appears  the  importance  of  business 
training.  The  man  who  is  trained  only  as  an  ordinary 
laboring  man,  the  man  who  can  not  do  more  or  better  in 
serving  those  who  possess  means  than  any  other  man  on 


92  HOW  FUNDS  ARE  OBTAINED 

the  street  can  do,  must  compete  with  him  in  the  market. 
Among  the  many  competing  for  work,  some  will  be  found 
who  are  willing  to  exchange  their  services  for  a  wage  barely 
sufficient  to  maintain  them  in  bodily  strength  and  comfort. 
If  one  is  able  to  do  only  such  work  as  these 

°ffer  to  d°'  tten  °De   mU6t  brmg  hifi   6tandard 

of  life  below  theirs ;  otherwise  no  margin  or 
surplus  will  be  left  for  capital  use— a  fund  can  not  be 
acquired  by  saving.  It  is  only  by  adopting  a  low  standard 
of  living  that  the  Chinaman  is  able  to  "  save."  But  what  is 
your  advantage  if  you  have  superior  training  ?  While  per- 
haps you  have  inherited  no  money,  have  had  no  capital 
funds  given  to  you  by  family  or  friends,  you  have  a  "  gift " 
which  has  quality  quite  as  productive  of  income.  More 
than  that,  while  you  retain  your  faculties  you  may  always 
maintain  an  advantage  over  the  ordinary  laborer.  It  is  this 
in  part  which  has  inspired  your  natural  guardians  to  devote 
so  many  years  to  your  training.  Without  a  dollar,  you  are 
able  to  go  out  into  the  world,  to  maintain  a  standard  of  life 
that  allows  you  still  further  to  develop  your  faculties,  still 
further  to  handicap  your  competitors,  or  to  lay  by  "  in 
investment "  an  increasing  fund  with  which  you  may  finally 
equip  yourself  for  the  successful  employment  of  the  skill 
and  labor  of  others  in  the  management  of  a  business  of  your 


SALES  OF  TANGIBLE  PROPERTY  AND  BUSINESS  INTERESTS 

Instead  of  selling  your  labor  to  others,  instead  of  ex- 
changing your  services  for  income  in  the  form  of  wages, 
Sale  of  goods  vou  mav  decide,  after  the  first  funds  are  saved, 
produced  by  to  begin  business  in  a  humble  way  on  your  own 
account.  Possibly  you  may  undertake  the  busi- 
ness of  shoemaking.  Having  saved  enough  to  buy  a  small 
outfit,  a  few  sides  of  leather,  and  having  enough  for  a 
month's  living  besides,  you  may  leave  the  factory  where  you 
have  been  employed  and  open  a  shop  of  your  own.  Let  us 


FUNDS  OBTAINED  BY  EXCHANGE  93 

suppose  that  one  pair  of  shoes  may  be  made  in  a  day,  and 
that  the  cost  of  materials  and  of  living  were  $3  per  day.  It 
would  not  be  long  before  all  your  funds  would  be  exhausted ; 
but,  instead  of  funds,  you  would  have  the  products  of  your 
labor.  Funds  for  future  production  must  come  from  the 
sales  of  these  products.  If  each  pair  of  shoes  might  be 
sold  for  $5  per  pair,  then,  if  there  were  no  items  of  loss,  you 
would  have  a  profit  of  $2  on  each.  This  amount,  by  a 
strict  economy,  might  be  added  to  your  capital.  Accumu- 
lated funds  from  sales  of  shoes  would  allow  you  con- 
stantly to  increase  your  business  equipment.  If,  on  the  other 
hand,  you  were  unable  to  dispose  of  your  product  in  com- 
petition with  the  factory  for  more  than  $3  per  pair,  then  a 
bare  living  would  remain — your  business  would  just  pay 
expenses.  A  further  reduction  in  price  would  cause  your 
capital  funds  to  disappear ;  it  would  become  necessary  for 
you  again  to  fall  back  on  the  sale  of  your  services  to  others. 
To  those  successfully  employed  in  the  management  of 
industry,  the  chief  source  of  revenue  is  from  sales  of  the 
products  of  labor. 

It  often  happens  that  one  has  properties  not  adapted  to 
capital  use.  A  private  residence  or  a  large  private  park  is 
inherited  ;  investments  that  yield  a  fixed  inter- 
proplriynot  est  or  rental  ma.y  be  owned.  These  are  not 
adapted  to  funds  for  business ;  they  can  not  be  utilized  to 
'plowmen™'  advantage  in  the  enterprise  about  to  be  under- 
taken. To  one  so  situated  the  most  practicable 
way  of  obtaining  funds  may  be  by  the  sale  of  these  proper- 
ties. By  conversion  of  these  forms  of  wealth  into  capital 
funds  a  business  may  be  equipped  which  will  produce  in- 
come in  the  form  of  profits. 

The  shoemaker  after  equipping  a  factory  may  recog- 
nize a  better  business  advantage  in  another  locality.  He 
may  find  that  by  moving  to  an  inland  point  he  can  get 
water  power  where  now  he  is  required  to  use  steam.  The 
growth  of  population  in  new  territory  and  the  building  of 


94:  HOW  FUNDS  ARE  OBTAINED 

new  railroads  may  give  advantages  for  obtaining  raw  mate- 
rials, and  at  the  same  time  place  him  within  range  of  a 
general  market  for  his  goods.  He  can  not  remove  his 
plant,  however,  to  advantage.  Much  of  the 
The  sale  of  machinery  would  not  be  adapted  to  water 

one  business  *  .    r 

interest  to       power.     He  decides  to  sell  his  plant  for  what 
capitalize        ft  wj|j  bring,  as  a  means  of  obtaining  funds  for 

another.  ....  3     , 

the  new  enterprise.  A  miller  may  have  in- 
herited a  cotton  factory  from  a  brother.  Every  business 
advantage  suggests  the  propriety  of  disposing  of  the  cotton 
plant  and  using  the  funds  to  further  his  milling  interests. 
This  is  one  of  the  most  common  methods  of  obtaining  funds 
in  a  country  where  industries  are  constantly  shifting,  as  in 
our  own. 

Labor  and  tangible  property  are  not  the  only  things 
that  may  be  exchanged  for  funds.     Business  interests  may 

likewise  be  disposed  of.     Let  us  suppose  that 

The  sale  of  f  rr 

business          the   miller   has    been   making    a    considerable 

profit  out  of  his  business.  But  it  appears  that 
a  still  larger  return  may  be  had  if  he  doubles  his  capital. 
His  plant  is  a  comparatively  old  one ;  he  is  now  grinding 
50  barrels  of  flour  per  day  at  a  cost  of  $1  per  barrel.  Yet, 
owing  to  his  favorable  location,  he  is  able  to  make  a  profit 
of  $1  per  barrel  in  competition  with  others.  By  the  addi- 
tion of  as  much  more  capital  (say  $50,000),  by  using  it  to 
put  in  improved  machinery  and  labor-saving  devices,  he 
would  be  able  to  grind  at  a  cost  of  50  cents  per  barrel  and 
turn  out  200  barrels  per  day.  Instead  of  having  a  profit 
of  $50  per  day  witli  a  capital  of  $50,000,  he  would  with 
his  better  equipment  get  a  return  of  $300  per  day  on  a 
capital  of  $100,000.  But  how  is  he  to  obtain  funds  ?  He 
can  not  hope  to  raise  the  money  from  the  sale  of  his  serv- 
ices. His  profits  are  already  greater  than  would  be  the 
return  in  wages.  He  can  not  afford  to  wait  until,  by 
sales  of  goods  produced,  he  may  accumulate  $50,000  more 
in  funds.  He  has  no  properties  other  than  those  already 


FUNDS  OBTAINED  BY  EXCHANGE        95 

employed  in  his  business.     He  decides,  therefore,  to  obtain 
the  additional  capital  by  selling  an  interest  in  his  enterprise. 

Fortunately  he  finds  another  miller  who  has  $50,000  in 
funds,  and  who  is  looking  for  a  business  opening.  The 
Sale  of  books  of  the  mill  are  gone  over  and  its  present 

partnership  earning  capacity  is  calculated ;  the  cost  of  im- 
provement and  the  probable  increased  earning 
power  is  computed ;  the  whole  situation  is  carefully  can- 
vassed. Each  of  the  two  men  looks  into  the  business  stand- 
ing and  reputation  of  the  other.  They  finally  come  to  an 
agreement.  The  first  miller  sells  a  partnership  half -interest 
in  his  concern  upon  the  condition  that  the  second  miller  will 
put  in  $50,000  more  of  funds.  With  this  the  mill  is  newly 
equipped  ;  there  is  an  increased  return  in  profits  to  each. 

With  the  development  of  the  wheat  supplies  and  the 
wheat-growing  resources  of  the  vicinity  in  which  the  mill 
The  sale  of  *s  located,  the  partners  find  that  they  are  still 
corporate  unable  to  supply  the  market  with  flour  at  a 
price  that  gives  them  a  handsome  return  in 
profits  to  the  company.  Three-fourths  of  the  wheat  grown 
in  the  vicinity  is  shipped  away  for  grinding,  while  they  are 
not  using  more  than  one-third  or  one-quarter  of  the  water 
power  already  developed.  The  question  again  arises,  How 
may  they  obtain  the  capital  with  which  to  equip  their  in- 
dustry in  such  a  manner  as  to  take  advantage  of  the  pres- 
ent business  situation  ?  To  do  this  will  require  an  expendi- 
ture of  four  or  five  times  the  amount  expended  in  their 
present  plant.  They  find  no  other  miller  who  wishes  to 
join  with  them  in  the  business  ;  they  have  no  properties  to 
sell  by  means  of  which  they  may  secure  the  funds.  They 
finally  decide  to  incorporate  the  business — i.  e.,  to  offer 
shares  to  those  who  have  capital  to  invest,  but  who  are  not 
millers,  and  who  would  not  care  to  participate  as  partners. 
By  placing  shares  at  $100  apiece  on  the  market,  they  are 
able  to  sell  2,000  shares.  In  other  words,  they  find  that 
they  are  able  to  obtain  $200,000  additional  capital  made  up 


96  HOW  FUNDS  ARE  OBTAINED 

of  income  from  the  sale  of  proprietary  interests  in  the  cor- 
poration to  stockholders.  With  the  additional  $200,000 
they  build  two  other  mills  of  capacity  and  equipment  simi- 
lar to  the  first. 

Capital  stock  is  the  total  amount  of  capital  funds  of  a 
corporation  invested  by  its  shareholders.  The  certifi- 
cates of  interest  held  by  investing  members  are  called 
stock.  Another  term  commonly  used  is  "shares."  This 
term  is  almost  exclusively  employed  in  England.  There, 
"  stock  "  has  the  same  significance  that  the  term  "  Govern- 
ment security "  has  in  America.  The  stockholders  of  a 

corporation  are  those  who  make  the  joint  con- 
Capital  tributions  to  the  capital  funds  or  capital  stock 

of  a  corporation.  They  have  (1)  such  cor- 
porate rights  as :  To  participate  in  the  organization  of  the 
company,  to  attend  meetings  of  stockholders,  elect  officers, 
to  hold  meetings  for  the  purpose  of  determining  the  powers 
to  be  granted  and  the  rules  governing  their  officers  and 
agents,  to  give  direction  to  the  general  policy  of  the  cor- 
poration through  the  officers  elected,  etc. ;  (2)  the  financial 
rights,  first,  to  share  in  the  dividends  set  apart  for  the  share- 
holders out  of  the  net  profits  of  the  business  of  the  cor- 
poration ;  and,  secondly,  to  have  a  share  in  the  capital  dis- 
tributed to  the  stockholders  after  the  corporation  proper 
has  been  sold  and  its  affairs  wound  up.  While  the  cor- 
poration exists,  however,  the  stockholder  has  no  right  to 
touch  a  dollar  of  its  assets  or  transact  any  of  its  business. 
The  capital  once  contributed  becomes  the  property  of  the 
corporation  absolutely.  The  stockholder  may  be  said  to 
have  sold  a  certain  amount  of  his  money,  or  credit,  or  other 
property,  to  the  corporation,  and  in  return  has  received  one 
or  more  shares  of  its  capital  stock,  the  amount  being  esti- 
mated in  the  funds-equivalent  or  price  of  that  which  has 
been  sold.  For  example  :  In  the  organization  of  a  corpora- 
tion a  certain  amount  of  the  stock  may  be  issued  in  ex- 
change for  plants  purchased  at  an  agreed  price,  while  other 


98  HOW  FUNDS  ARE  OBTAINED 

shares  may  be  sold  for  "  cash."  No  one  may  transact  any 
business  for  the  corporation  except  a  duly  authorized  officer 
or  agent.  The  business  of  a  corporation  is  in  the  hands  of 
its  officers.  The  assets  of  a  corporation  belong  to  the  cor- 
poration as  fully  and  completely  as  the  moneys  in  the 
Treasury  of  the  United  States  belong  to  the  Governmento 
A  stockholder  has  as  little  right  to  appropriate  assets  and 
to  attend  to  the  business  of  the  corporation  as  has  a  private 
citizen  to  take  money  from  the  public  treasury  or  to  attempt 
to  do  the  business  of  the  Government. 

A  stock  certificate  is  the  written  evidence  of  a  propor- 
tionate amount  of  the  total  capital  which  has  been  invested 
by  a  single  stockholder  in  the  stock  of  a  corpo- 
ration. The  capital  stock  of  a  corporation  is 
usually  divided  into  shares  having  a  funds- 
equivalent  of  $100  each.  That  is,  if  a  company  were  or- 
ganized with  a  capital  of  $100,000  they  would  have  1,000 
shares  of  stock  to  sell.  Each  person  who  buys  or  sub- 
scribes for  "  stock  "  receives  a  "  certificate  "  which  indicates 
the  number  of  shares  which  he  has  purchased  by  exchange 
of  money  or  other  property. 

The  differences  between  a  corporation  and  a  partnership 
are  many.  In  the  first  place,  each  partner  may  transact 
any  business  for  which  the  partnership  was  organized,  and 
each  partner  is  liable  for  all  the  debts  of  the  partnership. 
In  a  corporation,  however,  the  stockholders  have  no  right 
~  to  transact  any  business  of  the  concern,  this 

between  cor-  being  left  to  the  properly  appointed  agents, 
P°artnerlMnd  and  tne  stockholders  are  not  liable  for  the  debts 
of  the  company.  With  the  death  or  with- 
drawal of  a  partner  the  partnership  becomes  dissolved,  and 
the  business  of  the  partnership  must  be  wound  up.  The 
death  of  a  stockholder  does  not  in  any  manner  affect  the 
life  of  the  corporation.  Its  business  may  go  on  regardless 
of  stock  ownership.  A  partnership  interest  may  not  be 
sold  without  the  consent  of  the  other  partners;  a  stock 


100  HOW  FUNDS  ARE  OBTAINED 

certificate  may  be  transferred  at  the  pleasure  of  the  owner. 
The  responsibility  of  a  stockholder  is  generally  limited  to 
the  amount  of  his  stock  purchase.  If  the  business  is  poorly 
managed  he  may  not  receive  dividends  on  his  stock; 
through  the  bankruptcy  of  the  corporation  he  may  even 
lose  his  invested  capital ;  beyond  this,  however,  he  is  sel- 
dom held  liable.  In  some  cases,  as  in  banking  concerns, 
stock  liability  is  somewhat  enlarged,  and  the  stockholder 
is  held  responsible  in  double  the  amount  of  his  investment. 
Aside  from  those  above  enumerated,  the  advantage  of 
corporate  organization  is  found  in  the  amount  of  capital 
funds  or  funds-equivalent  of  property  that  may 
advantage  of  be  secured  in  this  way.  So  long  as  it  is  made 
the  corpora-  to  appear  to  the  investor  that  he  can  obtain  a 
fair  return  in  dividends,  there  is  practically  no 
limitation  to  the  amount  of  capital  that  may  be  drawn  to- 
gether by  the  sales  of  stock.  Being  assured  of  competent 
management,  the  man  with  $100  may  contribute  with  the 
same  degree  of  confidence  and  the  same  prospect  of  re- 
turn as  the  man  with  $1,000  or  $10,000.  The  only  limit 
to  capitalization  is  found  in  the  limit  of  profits.  The  fact 
that  the  business  itself  is  a  local  one,  however,  may  so  far 
confine  the  knowledge  of  its  management  and  of  its  profit- 
able character  to  its  managers  that  but  few  persons  having 
funds  to  invest  will  care  to  purchase  shares;  such  an  indus- 
try as  milling,  therefore,  is  usually  confined  to  a  local 
investing  constituency. 

The  partners  to  the  milling  enterprise  had  found  a  mar- 
ket for  2,000  shares  of  stock.     Besides,  the  old  plant  of  the 
partners  was  turned  into  the  corporation  at  a 
Common         vaiuation  equai  to  $100,000;  in  the  new  cor- 
porate concern  each  of  the  partners  was  given 
$50,000  worth  of  stock.     This  made  the  total  capital  stock 
$300,000.     These  contributions  were  all  made  under  simi- 
lar conditions    and   conferred   on    the   purchaser    similar 
rights.     The  common  stock  of  a  corporation  is  that  repre- 


FUNDS  OBTAINED  BY  EXCHANGE 


101 


senting  the  interest  of  contributors  of  properties  or  funds 
who  are  entitled  to  dividends  and  to  exercise  corporate 
powers  without  preference. 


After  the  expenditure  of  the  $200,OQO  contributed,  the 
wheat-growing  region  suffered  a  drought,  and  the  supplies 
of  wheat  for  milling  fell  so  far  short  of  former  yields  that 


102 


no\V    FUNDS   ARE  OBTAINED 


the  plant  could  not  be  run  to  more  than  one-third  its  ca- 
pacity.    Moreover,  the  wheat  was  of  inferior  quality,  and 


the  flour  produced  could  not  be  sold  at  a  profit  in  competi- 
tion with  flours  ground  in  other  places.  At  the  end  of  a 
year  it  was  found  that  the  milling  company  had  suffered  a 


FUNDS  OBTAINED  BY  EXCHANGE 


103 


loss  of  $50,000 — had  incurred  a  floating  debt,  payment  of 
which  was  demanded.     This  gave  rise  to  a  new  situation — 


a  new  demand  for  funds,  one  which  could  not  offer  a 
"  profitable  "  business  as  a  funding  base.  Under  such  cir- 
cumstances the  common  stockholders  decided  to  hold  a 


104  HOW  FUNDS  ARE  OBTAINED 

meeting  to  determine  how  the  $50,000  might  be  raised. 
They  did  not  feel  disposed  or  able  to  purchase  more  shares 
in  the  stock  of  the  corporation.  Another  expe- 
dient,  however,  was  at  hand — the  issue  of  pre- 
ferred stock.  The  preferred  stock  of  a  corpora- 
tion is  usually  given  to  secure  some  obligation  of  the  company 
or  to  meet  some  special  demand  for  capital  when  common 
stock  may  not  be  disposed  of  to  advantage.  To  this  class 
of  stock  are  given  special  dividend  privileges — that  is,  this 
kind  of  stock  is  entitled  to  a  preferred  claim  against  the 
profits  of  the  company.  If  a  man  holds  a  share  of  pre- 
ferred stock  he  will  receive  dividends  on  it  before  any  divi- 
dends are  given  to  the  common  stockholders.  The  con- 
tract of  preferment,  as  in  the  case  of  the  Loder  Brewing 
Company,  may  also  give  a  first  claim  to  holders  of  preferred 
stock  on  distribution  of  funds  in  the  dissolution  of  the  com- 
pany— the  preferred  stock  may  be  given  a  right  to  have  its 
proportion  of  capital  repaid  before  any  distribution  is  made 
to  the  common  stock.  This  being  a  bad  year  for  the  mill, 
and  there  being  a  prospect  for  a  future  profit,  such  an 
arrangement  allowed  the  common  stockholders  to  dispose 
of  preferred  shares  for  funds  with  which  to  pay  the  float- 
ing debt  of  the  corporation. 

There  may  be  several  kinds  of  preferment — e.  g.,  the 
common  stockholders  together  may  decide  to  offer  to  those 
Kinds  of  W^1Q  w^  contribute  new  capital,  a  preferred 
preferred  right  to  have  6  per  cent  dividends  paid  to  them 
out  of  the  funds  set  aside  for  the  payment  of 
dividends  before  the  common  shareholders  shall  receive  any- 
thing at  all.  Again,  an  agreement  may  be  made  whereby  the 
preferred  stockholder  may  have  a  first  distribution  of  6  per 
cent  in  preference  to  the  common,  and  then  after  the  common 
stock  shall  have  received  5  per  cent,  if  there  be  any  profits 
remaining,  the  preferred  stockholder  may  have  a  preferred 
right  to  3  per  cent  more. 

If,  later,  another  contribution  becomes  desirable,  and  the 


106  HOW  FUNDS  ARE  OBTAINED 

common  together  with  the  first  preferred  stockholders  are 
not  able  to  furnish  the  funds  needed,  they  together  may 

agree  to  offer  for  sale  another  series  of  shares 
ferrefand  which  shall  take  precedence  over  both  former 
second  pre-  issues,  and  in  which  the  new  issue  shall  stand 

as  first  preferred  and  the  others  in  their  former 
dividend-paying  relations.  The  new  preferred,  therefore, 
would  have  first  claim,  the  old  preferred  second  claim,  and 
the  common  would  have  third  claim  to  dividends. 

The  conditions  of  preferment  may  be  such  (in  case  divi- 
dends are  not  declared  at  a  regular  time  agreed  upon  and 

to  the  amount  provided)  that  the  amount  of 
an™non-Ve  dividend  which  is  "  passed,"  that  is,  which  passes 
cumulative  over  as  not  paid,  shall  "cumulate"  and  become 

an  additional  charge  against  the  amount  set 
apart  as  dividends  to  be  paid  to  the  preferred  stockholder 
out  of  future  profits  before  the  common  stockholders 
may  participate.  If  no  such  provision  be  made  in  the  con- 
tract of  preferment,  however,  the  stock  is  "non-cumula- 
tive," and  a  "  passed  "  dividend  will  be  lost  to  the  preferred 
stock.  Under  the  cumulative  feature  of  preferred  stock, 
it  will  readily  be  understood,  a  number  of  "  passed  "  divi- 
dends may  become  such  an  enormous  charge  upon  the  future 
earnings  of  the  company  as  to  render  the  common  stock 
practically  worthless.  On  the  other  hand,  the  "  non- 
cumulative  "  feature  may  allow  the  common  stockholders, 
through  their  officers,  to  delay  the  payment  of  dividends 
on  preferred  until  such  a  surplus  has  been  acquired  by 
the  company  that  the  common  stockholders  may  receive 
much  more  than  their  proportionate  share  of  the  profits ; 
without  a  cumulative  preferment,  the  representatives  of 
the  common  stock  may  continue  to  apply  the  profits  to 
improvements  until  the  industry  shall  become  so  highly 
profitable  through  added  capital  that  the  regular  return 
to  the  common  stock  may  far  exceed  that  which  is  fixed  for 
the  preferred. 


108  HOW  FUNDS  AEE  OBTAINED 

It  sometimes  happens  that  a  number  of  stockholders  may 
wish  to  pool  their  holdings  in  a  company  for  purposes  of 

control.  To  this  end  the  stockholders  agreeing 
Certificate  ™^  appoint  a  trustee  to  hold  the  stock  and 

exercise  all  rights  of  control  for  them.  The 
trustee  gets  his  powers  from  a  written  trust  agreement,  un- 
der which  he  pays  to  the  several  stockholders  the  dividends 
declared,  and  finally  delivers  the  shares  after  the  trust 
agreement  is  terminated.  When  such  an  arrangement  is 
made  the  trustee  issues  to  each  stockholder  depositing  his 
stock  a  trust  certificate.  One  of  the  trust  certificates  issued 
by  J.  P.  Morgan  &  Co.  as  trustee  for  Eeading  First  Pre- 
ferred is  given  on  page  107.  An  examination  of  the  certifi- 
cate will  further  explain  its  use. 

Other  special  forms  of  stock,  such  as  guaranteed  stock, 
founder's  shares,  treasury  stock,  etc.,  are  allowed  under  the 

laws  of  some  States.  These  might  be  enlarged 
Oth&r  forms  T1pOn5  DU^  for  the  purposes  of  this  treatise  it  is 

sufficient  to  call  attention  to  the  principal  pro- 
prietary interests  which  may  be  sold  as  a  means  of  obtaining 
funds  for  enterprise.  We  pass  now  to  a  consideration  of 
sales  of  credit. 


CHAPTER  VII 

FUNDS  OBTAINED  BY  SALES  OF  COMMERCIAL 
CREDIT 

THERE  are  still  other  ways  of  obtaining  funds  by  ex- 
change— methods  which  do  not  involve  the  sale  of  labor, 
tangible  properties,  or  business  interests.  If  one  has  salable 
credit,  this  may  be  disposed  of  to  meet  the  funding  needs 
of  business.  In  Part  I  credit  was  discussed  as  a  form  of 
funds.  AVe  will  now  discuss  its  use  as  a  means  of  obtaining 
funds. 

Credit  is  bought  and  sold  in  the  market  in  the  same 
manner  as  are  services,  or  stocks  of  merchandise.  Before 
The  extent  a  sale  of  credit  may  be  made,  however,  one 

of  credit          must  find  a  purchaser — some  one  who  is  will- 

uses  by  the  r  , . 

laboring          ing  to  exchange  money  or  credit  funds  for  a 

man-  promise  to  deliver  money  at  a  future  time.     In 

this  is  found  its  limitation  ;  it  is  this  that  places  it  beyond 
the  reach  of  the  ordinary  laborer  as  a  means  of  obtaining 
capital.  The  day-laborer  goes  to  the  man  of  means  (the 
capitalist),  and  proposes  to  give  him  his  promise  to  pay  $110 
one  year  hence  for  $100  in  gold.  The  man  of  means  says 
"  No."  Some  such  reasoning  as  this  goes  on  in  the  capitalist's 
mind :  "  You  have  never  been  able  to  do  more  than  main- 
tain yourself."  "  Yes,  it  is  true  you  have  paid  your  account 
at  the  grocer's ;  you  have  kept  faith  with  those  who  have 
furnished  the  means  necessary  to  'maintenance'  on  credit, 
but  you  have  never  displayed  any  ability  to  acquire  *  capital.' " 
"  What  surplus  earnings  you  have  had  were  dissipated." 
"  You  have  not  the  ability  nor  the  integrity  to  make  your 

109 


110  HOW  FUNDS  ARE  OBTAINED 

credit  good."  In  other  words,  in  the  judgment  of  the  capi- 
talist, the  credit  which  the  laboring  man  tries  to  dispose  of 
for  capital  funds  is  seldom  considered  worth  as  much  as  the 
money  for  which  it  is  offered.  The  capitalist  will  not  trade. 
One  with  thrifty  habits  and  good  training,  on  the  other 
hand,  may  meet  with  greater  success.  On  leaving  college 
you  may  go  to  a  banker  to  whom  you  are  known  and  offer 
him  your  note.  At  first  he  may  be  unwilling  to  buy  your 
credit.  You  may  even  have  trouble  to  find  a  business  man- 
ager who  is  willing  to  buy  your  services.  But  eventually 
you  get  employment.  You  demonstrate  your  ability.  You 
show  yourself  to  be  a  man  capable  of  performing  a  service 
for  which  employers  are  willing  to  pay  $1,000  or  $2,000 
per  year.  You  exhibit  some  special  fitness  for  the  manage- 
The  man  of  men^  or  direction  of  some  industrial  function ; 
ability  and  perhaps  you  have  invented  something,  the  use 
integrity.  of  which'  win  be  of  advantage  jn  production ; 

you  demonstrate  that  you  have  the  power  to  form  judg- 
ments of  such  superior  quality  that  a  business  dependent  on 
such  decision  may  be  handled  with  increased  profits.  Now, 
without  capital,  with  nothing  but  this  ability  displayed,  and 
a  reputation  for  habits  of  industry  and  integrity,  you  again 
approach  the  man  of  means  and  offer  your  credit  for  funds 
with  which  to  capitalize  your  advantage,  and  he  is  willing — 
even  anxious — to  exchange.  Why  is  this  ?  Why  are  you 
able  to  procure  capital  funds  "  on  credit,"  without  awaiting 
the  slow  process  of  saving,  while  thousands  of  others  are 
required  to  depend  on  the  surplus  accumulated  from  wages 
earned  ?  The  answer  is  plain.  The  capitalist  believes  that 
he  is  making  a  good  trade.  You  have  something  to  sell, 
besides  your  ability  to  work  for  others,  which  he  values 
more  highly  than  he  does  the  amount  of  money  for  which 
credit  is  offered — your  ability  to  use  capital  in  such  a  way 
that  you  will  be  able  to  deliver  the  amount  obtained  "  with 
interest."  The  man  of  means  sees  in  the  transaction  a 
profit  to  himself.  In  exchange  for  funds  sold,  he  gets  a 


SALES  OP  COMMERCIAL  CREDIT  111 

claim  to  future  income  which,  in  his  judgment,  will  be  to 
his  own  advantage. 

One  possessed  of  tangible  property  or  business  interests 
has  still  less  difficulty  in  convincing  the  capitalist  of  his 
ability  to  meet  his  contracts  for  future  delivery.  He  offers 
to  sell  credit  because  he  does  not  care  to  sell  his  tangible 
The  man  property  or  business  interests.  The  property 
with  gives  a  double  advantage:  by  its  use  a  larger 

property.  income  is  assured;  if  this  larger  income  does 
not  suffice,  the  property  is  still  capable  of  being  sold  as  a 
means  of  obtaining  "  funds  "  with  which  to  meet  credit  con- 
tracts. All  of  this  is  taken  into  account  by  the  one  to 
whom  the  man  with  property  offers  to  sell  his  credit. 

CREDIT   INSTRUMENTS   USED   AS  A  MEANS  OF 

OBTAINING  FUNDS 

A  promissory  note  is  a  written  contract  for  the  future 
delivery  of  a  specified   sum  of  money.     The  contract  is 
similar  to  that  made   between  speculators  in 
Promissory     grajn  or  securities   known  as  futures,  except 
that  the  "  note  "  is  for  the  delivery  of  money 
instead  of  a  particular  grade  of  wheat  or  a  particular  class 
of  bonds.    The  delivery  must  be  made  on  or  before  a  stated 
time,  and  nothing  will  satisfy  the  contract  except  the  de- 
livery of  the  particular  thing  promised. 

There  is  nothing  fixed  or  prescribed  about  the  form  of 
the  promise ;  it  may  be  expressed  in  any  way  so  long  as  its 
essentials  are  present.     These  essentials  will  be 
set  forth  in  detail.    Being  a  contract  in  writing, 
the  parties  must  be  set  forth  in  the  instrument.     There 
must  be  at  least  two  parties  named — the  one  to  whom  the 
promise  is  made  and  the  one  making  it.     The 
one  making  the  note  is  called  the  maker ;  the 
one  to  whom  it  is  made  is  called  the  payee. 
The  maker  usually  signs  his  name  under  the  writing  which 
carries  the  promise.     There  may,  however,  be  two  or  more 


112  HOW  FUNDS  ARE  OBTAINED 

makers  of  the  same  note.  A  note  that  has  two  or  more 
makers  is  called  a  joint  note.  Joint  notes  may  be  made  by 
each  individual  signing  his  name  individually,  or  in  case 
several  persons  are  combined  in  business  relations  as  part- 
ners, one  of  the  partners,  or  one  authorized  to  sign  the 
partnership  name,  may  subscribe  the  name  of  the  partner- 
ship and  bind  them  all.  The  payee  may  be  the  one  whose 


JOHNSTOWN,  PENNSYLVANIA,  June  30,  1900. 

Thirty  days  after  date  we  jointly  promise  to  pay  to 
Sylvester  Jones,  One  Thousand  Dollars,  with  interest  at 
the  rate  of  six  per  cent  per  annum. 

BIKDWELL,  SMITH  &  BROWN, 
by  VAUGHAN  BROWN. 


name  is  inserted  in  the  note  at  the  time  it  is  made  and  de- 
livered. Commercial  usage,  however,  has  allowed  the  words 
"  or  order  "  to  be  added.  Such  expressions  as  "  Pay  to  [name 


/ooa, 


of  payee]  or  order,"  or  "Pay  to  the  order  of  [name  of 
payee],"  indicate  that  the  one  named  may,  in  writing,  di- 
rect payment,  or  delivery,  to  be  made  to  some  one  other  than 
himself.  Above  is  a  form  of  note  that  is  defective,  for 


SALES  OP  COMMERCIAL  CREDIT  113 

the  reason  that  no  payee  is  named  in  the  instrument.     This 
defect  may  be  overcome  by  negotiating  the  note. 


BALTIMORE,  MARYLAND,  January  10,  1899. 

On  the  first  day  of  September,  1899,  we  promise  to 
pay  to  Martin  Lowden,  or  order,  the  sum  of  One  Hun- 
dred Fifty  Dollars,  with  interest  from  date  at  four  per 
cent  till  paid.  Louis 

J.  L. 


The  right  granted  to  the  payee  named,  to  order  payment 
to  be  made  to  another,  does  not  make  the  contract  any  less 
2.  Words  of  certam  as  to  whom  payment  is  to  be  made,  but 
transfer-  it  gives  to  the  instrument  higher  value  by  mak- 
abihty.  jng  ^  negotiable.  Negotiable  in  the  commer- 

cial sense  means  transferable;  a  negotiable  note  is  one 
which  may  be  transferred  from  one  person  to  another  by 
such  acts  or  writing  as  is  necessary  to  give  evidence  of  the 
right  of  the  person  presenting  it  to  receive  payment.  The 
insertion  of  the  words  "or  bearer"  instead  of  "or  order" 
effects  the  same  end.  This  makes  the  note  negotiable  with- 
out assignment  or  indorsement ;  nothing  need  be  added  to 
it  to  show  title  or  a  right  in  the  one  presenting  it  to  receive 
payment.  A  note  that  has  no  such  words  as  "or  order"  or 


NEW  YORK  CITY,  July  5,  1900. 

One  year  from  date  I  promise  to  pay  to  John  P.  Lar- 
kin,  or  bearer,  the  sum  of  Two  Hundred  Fifty  Dollars, 
gold  coin  of  the  United  States  of  present  weight  and 
fineness,  at  the  Chemical  National  Bank. 

CHARLES  0.  PASTORITJS. 


"or  bearer"  added  after  the  name  of  the  payee,  but  on  its 
face  makes  the  money  promised  payable  to  a  definite  per- 
son, is  not  transferable  and  is  non-negotiable. 


114  HOW  FUNDS  ARE  OBTAINED 

The  promise  clause  contains  the  essence  of  the  agree- 
ment, and  though  it  may  take  any  form  of  expression,  the 
meaning  must  be  an  unconditional  obligation 
on  the  Part  of  the  makers. to  PaJ  a  definite  sum 
of  money.  In  case  there  be  more  than  one 
maker,  the  expression  "  we  promise,"  or  "  we  jointly  prom- 
ise," means  that  each  of  the  makers  agrees  to  pay  a  certain 
proportion  of  the  amount  of  money  named ;  while  "  we 
jointly  and  severally  promise"  means  that  each  one  of  the 
makers  will  pay  the  whole  amount  if  the  others  fail  to  pay 
their  proportion.  The  promise  clause  may  be  simply  a 


$2,346.™; 

AVe  jointly  and  severally  promise  to  pay  to  the  United 
States  Trust  Company  of  St.  Paul,  Minnesota,  the  sum 
of  Two  Thousand  Three  Hundred  and  Forty-Six  Dollars, 
on  the  tenth  day  of  December,  1893,  witli  interest  thereon 
at  the  legal  rate  till  paid.  GEORGE  P.  AUSTIN. 

ST.  PAVL,  MINNESOTA,  MARSHALL  MfiHAX. 

September  10,  1893.  ALONZO   PORTER. 


promise  to  pay  an  amount  stated  at  a  given  time.  In  this 
case  no  other  amount  may  be  collected  at  that  time.  But 
that  part  of  the  contract  which  contains  the  promise  is 
usually  in  two  clauses :  the  one  contains  a  promise  to  pay 
a  definite  amount  called  the  "  principal "  sum,  and  the 
other  states  a  second  proportionate  sum  to  be  paid  as  "in- 
terest." This  later  claim  is  sometimes  in  words  which  re- 
quire a  mathematical  computation  in  order  to  determine  the 
amount  due.  The  principal,  however,  must  always  be  a  fixed 
sum ;  otherwise  the  amount  of  interest  may  not  be  deter- 
mined, and  any  uncertainty  as  to  the  amount  due  would  de- 
stroy its  character  as  a  promissory  note.  Sometimes  the  addi- 
tional sum,  called  "  interest,"  is  made  the  consideration  for  a 
separate  note,  in  which  case  the  interest  sum  appears  as  a 


SALES  OF  COMMERCIAL  CREDIT  115 

definitely  determined  amount.  A  contract  made  payable 
in  anything  but  money  is  a  form  of  obligation  that  would 
be  enforced,  but  it  would  not  be  a  "  promissory  note " ;  it 


$50.=  PEOEIA,  ILLINOIS,  January  27,  1898. 

On  the  27th  day  of  July,  1898, 1  promise  to  pay  to  Ja- 
cob Straussner,  or  order,  the  sum  of  Fifty  Dollars,  at  his 
office,  No.  234  Main  Street,  with  interest  at  the  rate  of  6 
per  cent,  after  maturity,  the  same  being  for  an  instalment 
of  interest  due  on  that  day  upon  my  principal  promissory 
note,  of  even  date  herewith,  payable  to  Jacob  Straussner, 
or  order,  three  years  after  this  date  for  the  sum  of  Two 
Thousand  Dollars  ($2,000).  L  B  FRENCH 


would  not  pass  as  commercial  paper.  Such  contracts  are 
common  in  the  market-place,  but  they  are  not  usually 
made  negotiable,  and  would  not  be  called  "credit  instru- 
ments." They  are  not  in  any  wise  treated  as  such. 

The  date  of  making  and  issuing  a  note  has  a  double  sig- 
nificance. In  the  first  place,  it  is  the  common  custom  to 
4  As  to  date  make  a  note  payable  a  certain  number  of  days 
of  making  a  or  months  after  date,  though  some  bankers  and 
business  men  now  consider  it  better  form  to 
draw  notes  and  time  drafts  payable  at  a  certain  time  stated 
in  the  instrument,  as,  "On  the  10th  of  March,  1897,  I 
promise  to  pay."  In  this  case  a  date  of  making  is  not 
necessary.  In  the  second  place,  the  date  of  the  note  may 
affect  its  validity.  In  most  Christian  countries  a  note  made 
and  issued  on  Sunday  is  void.  The  date  of  maturity  is  the 
day  on  which  a  note  becomes  legally  due — the  day  on 
which  the  payee  has  a  right  to  demand  the  money  prom- 
ised. The  date  of  maturity  can  not  be  left  indefinite ;  no 
doubt  must  be  left  as  to  the  time  when  demand  for  pay- 
ment may  be  made.  In  finding  the  date  of  maturity  it  is  im- 
portant to  remember  that  when  a  note  is  drawn  "  days  after 
9 


116  HOW  FUNDS  ARE  OBTAINED 

date "  the  actual  days  must  be  counted,  and  when  drawn 
"  months  after  date  "  the  time  is  reckoned  by  months.  At 
common  law  a  note  is  not  legally  due  till  three  days  after  the 
expiration  of  the  specified  time.  These  are  called  "  days  of 
grace"  The  party  making  a  note  may  waive  the  right  to 
days  of  grace  by  express  contract  in  the  instrument  itself. 
Some  jurisdictions  have  made  this  unnecessary  by  statutory 
enactment.  Where  "days  of  grace"  are  abolished  by 
statute  the  note  falls  due  on  the  day  stated  in  the  contract. 


$25.—  STOKESVILLE,  MONTANA,  June  20,  1898. 

I  hereby  promise  to  pay  to  the  Stokesville  National 
Bank  the  sum  of  Twenty-Five  Dollars,  three  months 
from  date,  interest  at  one  per  cent  per  month,  without 
grace,  the  usual  three  days  of  gracv  being  hereby  specific- 
ally  waived  by  me.  LAWRENCE  LOGAN. 


The  maker's  signature  must  appear  in  some  form  upon 
some  part  of  a  promissory  note.     It  usually  appears  imme- 
diately after  the   written  promise,  though   it 
signature         maJ  ^e  placed  on  any  part  of  the  instrument 
and   still   bind   him  to  the   performance.      It 
need  not  be  affixed  by  himself,  however  ;  signature  may  be 
made  by  any  authorized  attorney  or  agent.     It  may  be  the 
full  name  or  only  the  initials.     The  usual   business  signa- 
ture should  be  used  as  a  matter  of  avoiding  doubt  or  ques- 
tion.    When  a  man  who  can  not  write  is  asked  to  sign  a 
note  or  other  legal  instrument,  the  usual  custom  is  for  some 
one  else  who  can  write  a  legible  hand  to  inscribe  his  name. 
This  should  be  so  written  as  to  leave  space  in 
fignature.         tne  written  line  for  a  cross.     After  explaining 
the  nature  of  the  instrument  the  signer  or  maker 
is  asked  to  place  a  cross  in  the  space  left,  as  shown  in  the 
exhibit.     Above  and  below  the  cross,  and  in  the  presence  of 

his 
the  signer,  is  written    X  .     Such  a  signature  should  also  be 


SALES  OP  COMMERCIAL  CREDIT 


117 


witnessed.     A  witness  is  essential  for  the  reason  that  the 
signer  may  afterward  deny  that  he  executed  the  contract. 


Aside  from  the  essential  parts,  there  are  various  clauses 
added  from  custom  or  local  practice  that  do  not  affect  its 
va^(-^ty  nor  acM  ^°  ^s  obligations.     One  of  the 
most  frequent  of  these  is  the  phrase  "for  value 
received."      Thousands  of   good   notes  made 
without  any  value  consideration  stated  in  the 
instruments  themselves  are  handled  daily.     Notes  contain- 
ing this  phrase  are  an  old  form  of  written  evidence  of  the 
credit  contract  ;  the  newer  forms  drop  this  word- 

'defalcation."   in£'    In  Penils.ylvania  tne  words  "without  def- 

alcation "  are  inserted.     This  is  wholly  super- 

fluous.    "  Credit  the  drawer  "  is  sometimes  inserted  in  the 

lower  left-hand  corner  with  the  signature  of  the  payee. 


Non  essential 
clauses. 
"  Value  ^ 


The  manner  of  using  such  a  note  is  as  follows :    Lean- 
der  Jones  wishes  to  borrow  $100  from  James  Thompson. 


118  HOW  FUNDS  ARE  OBTAINED 

For  this  he  offers  his  note  for  the  amount  desired.  The 
note  is  executed  in  regular  form.  Instead  of  Thompson 
giving  to  Jones  the  money,  or  his  check  for 
$100'  noweverJ  ne  writes  on  its  face,  "Credit 
the  drawer,"  and  indorses  it.  Jones  then  takes 
the  note  to  his  bank  and  exchanges  it  for  a  bank  ac- 
count in  the  same  manner  as  if  Thompson  had  given  his 
check.  This  form  of  note  is  also  used  to  evade  the  "  mar- 
ried woman  "  clause  of  the  law,  which  prohibits  contracts 
of  surety  and  indorsement.  John  Patterson,  the  husband 
of  Augusta  Patterson,  wishes  to  obtain  funds  on  the  credit 

D 


rst  fjatioi}al  Bar?K  of  Bettyletyem. 


of  his  wife.  He  therefore  executes  his  note  to  her.  She 
enters  on  its  face,  "  Credit  the  drawer,"  and  then  indorses 
it.  This  allows  John  to  obtain  the  funds  needed  by  dis- 
counting it.  Ostensibly  John  is  the  maker  of  the  note  ;  in 
reality  it  is  Augusta  that  is  the  responsible  party. 

Another  peculiar  use  of  this  form  of  note  is  given 
opposite.  A  number  of  parties  are  commonly  interested 
in  raising  funds.  They  arrange  for  accommodation  by 
co-signature.  The  names  of  all  the  parties  who  are  to 
sign  are  entered  on  a  marginal  slip,  with  the  understand- 
ing that  the  note  will  not  be  complete  till  all  have  signed, 
it  being  understood  that  each  is  to  become  responsible 
for  a  pro  rata  only.  The  first  to  sign  is  understood  to 
be  the  drawer,  while  all  the  others  are  accommodation 
signers. 


SALES  OF  COMMERCIAL  CREDIT 


119 


Date 

Amount,  $ 

Time 

Due 

Discount . . .  Days . .  .  $ . 
Renewal  of  $ 


Leonard  Grafton. 
Hiram  Haclley. 
Peter  Mclntyre  Brown. 
Tyson  &  Mowbry. 
William  A.  Custari. 
L.  A.  Marks. 
Latshaw  Grocery  Co. 
J.  B.  Samuelson. 
E.  Browning. 
Alonzo  Parkinson. 
Uriah  Lundy. 
P.  B.  Cornlee. 


$ READING,  PENNSYLVANIA. 

We,  the  undersigned,  promise 
to  pay  to  THE  GARDEN  CITY 
STEAM  PAPER  AND  Box  MANU- 
FACTURING Co.,  or  order,  

month    after  date,  the    sum  of 

Dollars, 

without  defalcation  for  value  re- 
ceived, at  the  KEYSTONE  NA- 
TIONAL BANK  of  Reading,  Pa.  It 
is  understood  andagreed,  however, 
that  the  liability  of  the  subscrib- 
ers hereto  is  limited  in  such  man- 
ner that  each  shall  be  obligated 
only  to  pay  such  an  amount  there- 
of as  is  ascertained  by  dividing 
the  whole  amount  of  the  note  by 
the  number  of  subscribers. 

[Signed] 
CREDIT  THE  DRAWER. 

THE  GARDEN  CITY  STEAM 
PAPER  AND  Box  MANU- 
FACTURING Co. 


Treas. 


120  HOW  FUNDS  ARE  OBTAINED 

The  parts  of  a  note  containing  contracts  of  security  for 
payment  when  due  (expressed  or  implied)  are  found  :  (1)  In 
t    its  signatures  of  accommodation,  indorsement, 
containing      or  guarantee — i.  e.,  in  contracts  for  personal  se- 
contracts  of    curity.    (2)  In  its  special  clauses  carrying  trans- 
fers of  collateral,  powers  to  enter  judgment  by 
confession,  without  action,  rights  to  levy  execution,  etc. — 
i.  e.,  in  contracts  for  lien  security. 

An  accommodation  signature  is  given  as  security  for  the 
payment  of  a  note  by  one  having  no  interest  in  the  funds 
obtained  by  means  of  the  instrument  sold.  For 
security1  example,  one  may  apply  at  a  bank  for  a  loan, 
lie  offers  his  note  for  $105  (principal  and  inter- 
est), due  one  year  hence,  in  exchange  for  $100  in  cash. 
The  banker  refuses  to  take  the  note  at  that  price,  and  the 
one  offering  it  does  not  care  to  sell  it  for  less.  He  has  a 
friend  with  him,  and  the  banker  offers  to  give  $100  for  the 
note  if  the  friend  accompanying  him  will  become  an  "ac- 
Accommoda-  comin°dation  signer."  His  friend  agrees,  and 
lion  signa-  the  trade  is  made.  In  form  the  note  is  a  joint 
one — in  fact,  it  is  "accommodation  paper."  The 
maker's  friend  becomes  jointly  liable  with  him  for  the  pay- 
ment of  the  note,  but  his  obligation  is  purely  one  of  "ac- 
commodation " — that  is,  the  value  of  his  credit  (of  his  ability 
and  integrity)  is  added  to  the  principal  maker's  as  security 
to  the  banker  for  the  payment  of  the  sum  contracted  for. 

Indorsement  is  another  form   of  contract  of  security. 
Samuel  Johnson  is  owner  of  a  note  or  contract  made,  where- 
by Alonzo  Grey  agrees  to  deliver  $1,000  to 
Indorsement.      ,  -          „  „,     '        ' ,   T  ,  ,       .. 

the  order  of  Samuel  Johnson  one  month  after 

June  17th.  Johnson  takes  the  note  to  a  "  commercial  paper 
man  "  and  offers  to  sell  it  for  $995 — i.  e.,  he  offers  six  per 
cent  discount  as  an  inducement  to  purchase.  The  dealer, 
however,  does  not  know  Alonzo  Grey,  and  is  not  willing 
to  purchase  his  contract  to  pay  without  security.  He  is 
willing  to  purchase  Johnson's  credit,  however,  at  the  price 


SALES  OF  COMMERCIAL  CREDIT 


121 


offered.  He  therefore  proposes  that  he  will  give  the 
amount  asked  for  the  note  provided  Johnson  will  indorse 
it — write  his  name  across  the  back.  When  a  note  is 


$J_Q0Q_Z$r 

Pbjtotlu  ordtr  of 

THE  FIRST  NATlfML  BANK  OF  BETHLEHEM, 


x^ 
A  /\      A  ff 


made  payable  "  to  order,"  the  writing  of  the  name  of  the 
payee  across  the  back  performs  two  services.  In  the  first 
place,  this  is  necessary  in  order  to  assign  or  transfer  the 
right  to  receive  payment ;  a  note  which  is  made  payable 
"  to  bearer,"  however,  needs  no  assignment,  and  indorse- 
ment is  not  necessary  for  this  purpose.  In  the  second  place, 
the  "  indorsement "  is  a  contract  of  security — it  carries  with 
it  an  implied  promise  of  the  indorser  that  he  will  pay  the 
amount  promised  on  the 
day  it  is  due,  if  the 
maker  fails  to  do  so. 
Indorsement  is  usually 
made  in  blank — that  is 
to  say,  with- 
out the  words 
"  Pay  to  the 
order  of."  The  purchas- 
er of  the  note  is  then 
free  to  pass  it  on  from 
hand  to  hand  without 
further  assignment.  In 
such  case,  further  in- 
dorsement could  be  for  security  only.  If  the  owner  of  a 
note  wishes  simply  to  assign  it — that  is,  to  transfer  the  right 


Without 
recourse. 


122  HOW  FUNDS  ARE  OBTAINED 

to  receive  payment  from  the  maker,  without  also  becoming 
responsible  for  the  fulfilment  of  the  promise — this  may  be 
done  by  adding  the  words  "  without  recourse."  The  effect 
of  this  is  to  deprive  the  indorse- 
ment of  its  character  as  security. 
Kelease  from  liability  on  contract 
of  indorsement  after  it  is  made 
may  be  by  separate  agreement. 

One  may  guarantee  the  pay- 
inent  of  a  note  without  indorsing 
it — i.  e.,    by   entering 


of"^  into  an  additional  writ- 
ten contract.  If  there 
has  been  any  advantage  gained, 
any  new  consideration  passed  at 
the  time  such  guarantee  is  made, 
the  contract  will  be  valid  and  the 
guarantor  may  be  held  for  its  pay- 
ment. Without  consideration  the 
guarantee  is  void.  The  guarantee  is  usually  in  form  of 
a  separate  writing  and  not  made  upon  the  note  itself. 


FOR  VJILUE  RECEIVE®,.-  ....hereby  guarantee  the  prompt  payment,  at 
of  the  following  described  note     .  executed  under  seal  — 

maturity, 

and  maprsrd  by            ;  and  hold                ,  ,      tbound  by  this  guarantor  and  endors 

ment    the 

same  as  though  such  note  were  not  executed  under  seal. 

It  often  happens  that  it  is  of  mutual  advantage  to  pledge 
"  collateral  securities  "  (stocks,  bonds,  or  mortgages)  for  the 


SALES  OF  COMMERCIAL  CREDIT 


123 


payment  of  a  loan  instead  of  asking  personal  security  or 
executing  a  mortgage.  This  is  done  by  offering  a  regular 

promissory  note,  to  which  a  contract  is  added 
Collateral  getting  forfa  the  "securities"  delivered  and  the 

conditions  attached  to  their  delivery.  The  one 
granting  the  loan  will  hold  these  securities  subject  to  the 
agreement.  In  case  the  contract  for  payment  is  not  ful- 
filled, the  contract  of  security  may  be  relied  on  and  strictly 


I    t  =  «    :«32:sC 

!  -Si?  eg*  S^=U32  S. 

£H*Jf?ii'hi 


•3  =  c  "|-&lll  &2 

ifc-3fti2siii 

1*2*11*]  £.s|5S 


124:  HOW  FUNDS  ARE  OBTAINED 

enforced.  These  contracts  of  collateral  lien  security  have 
many  forms.  The  one  above  given,  it  will  be  noticed, 
authorizes  and  empowers  "the  holder  of  this  promissory 
note  (provided  the  same  is  not  paid  at  maturity)  to  sell  at 
auction  or  private  sale,  and  transfer,  without  further  refer- 
ence or  notice,"  to  the  maker  of  the  note,  "  and  apply  the 
proceeds  in  payment "  of  the  note,  "  together  with  interest 
charges  incurred  thereon."  Provision  is  also  made  for  the 
disposition  of  the  surplus.  This  contract,  together  with  the 
property  on  which  it  constitutes  a  lien,  serves  as  security  to 
the  purchaser  of  the  credit  promise  and  thereby  increases  its 
value.  It  enables  the  seller  of  credit  to  obtain  a  higher 
price  for  it  in  the  market. 

The  accompanying  form  of  note  was  largely  used  by 
banks  making  call-loans  to  customers  during  the  time  that  the 
Memoran-  stamp  revenue  act  was  in  force.  It  was  thought 
dum  collat-  to  contain  no  promise,  therefore  to  avoid  the 
'°  e'  necessity  of  paying  the  stamp-tax  imposed  on 
promissory  notes.  In  form  it  is  simply  a  memorandum 
made  by  the  cashier  to  the  effect  that  the  bank  had  advanced 

The  Bank,  Pa. 

s  this day  of. advanced  to 


Dollars,  collaterally  secured,  being  entitled  to  demand  » 


return  of  the  said  amount  with  interest  at  the  rate  of  __  per  cent  per 
on  demand.     Collaterals  deposited  herewith  listed  on  back  of  this  note. 


a  certain  amount  of  funds  to  the  customer  for  which  cer- 
tain collateral  had  been  deposited.  The  memorandum  was 
then  marked  "  O.  K."  or  "  Correct "  by  the  customer  over 
his  signature.  This  constituted  an  "  account  settled,"  and 
was  enforceable  at  law  as  an  instrument  of  collection.  Had 
the  revenue  officers  brought  this  form  of  instrument  before 


SALES  OP  COMMERCIAL  CREDIT  125 

the  courts  it  is  highly  probable  that  for  the  purposes  of  the 
act  it  would  have  been  declared  an  evasion  of  the  tax. 

Added  to  the  ordinary  form  of  note  of  promise  for  the 
future  delivery  of  money  is  often  found  a  clause  in  the  na- 
ture of  a  confession  of  judgment  for  the  prin- 
Juaqment  ,  J  /•       • 

note.  cipal  amount,  with  interest,  and  cost  ot  suit. 


$250.=  JACKSBORO,  TENNESSEE,  May  1,  1897. 

One  year  after  date,  for  value  received,  I  promise  to 
pay  to  Jonas  Greer,  or  bearer,  Two  Hundred  Fifty  Dol- 
lars, with  interest,  without  defalcation  or  stay  of  judg- 
ment. And  I  do  hereby  confess  judgment  for  the  above 
sum,  with  interest  and  cost  of  suit,  a  release  of  all  errors 
and  waiver  of  all  rights  to  inquisition  and  appeal,  and  to 
the  benefit  of  all  laws  exempting  property,  real  or  per- 
sonal,  from  levy  and  sale.  PET£R 


Another  form  of  judgment  note  is  one  authorizing 
some  one  to  act  as  attorney  for  the  maker— to  appear  and 

confess  judgment  for  the  amount  due  in  case 
note  with  of  default.  The  effect  of  this  contract  is  to 
^attorn/  allow  the  holder,  at  any  time  after  the  note  is 

due,  to  enter  judgment  and  to  seize  upon  any 
property  of  the  debtor  by  process  of  execution,  thus  secur- 
ing a  lien  upon  any  and  all  property  found  that  may  be 


..HOME  plONflL  BflNK  OT  Royerstord,  ra. 

^    Van/ 


126  HOW  FUNDS  ARE  OBTAINED 

necessary  to  satisfy  the  amount  of  the  contract.  It  is  a  very 
severe  form  of  agreement  by  way  of  security,  and  some  States 
on  this  account  have  made  it  illegal  for  reasons  of  public  pol- 
icy. The  following  form  is  unusual  in  that  it  combines  a  con- 
tract of  collateral  security  with  one  giving  power  to  enter  judg- 
ment without  action  for  any  deficiency  on  sale  of  collateral. 


A  promissory  note  performs  a  double  purpose  as  a 
funding  instrument :  (1)  It  is  a  form  of  instrument  which 
allows  the  maker  of  the  note  to  dispose  of  his  credit  in 
exchange  for  funds.  (2)  As  a  contract  for  the  future  de- 
livery it  is  an  instrument  in  the  hands  of  the  holder  by 
means  of  which  he  may  obtain  funds  through  sale  or 
through  payment  (the  delivery  of  the  funds  promised).  It 
is  this  second  use  that  we  still  have  to  consider.  Payment 
is  obtained  through  presentation,  and  depends  as  much  on 
the  punctuality  of  the  holder  as  on  the  punctuality  of  the 
maker.  A  note  should  be  presented  on  the  exact  day  of 
maturity.  When  made  payable  at  a  bank,  or  at  any  other 

place,  notes  must  be  presented  for  payment  at 
t.  the  Place  named.  If  no  place  is  specified,  a 

note  should  be  presented  at  the  maker's  place 
of  business  or  at  his  residence.  The  fact  that  a  note  is  not 
presented  on  the  day  of  maturity  does  not  affect  the'  obli- 


SALES  OP  COMMERCIAL  CREDIT  127 

gation  as  between  maker  and  payee ;  but  unless  there  is  an 
express  waiver  of  rights,  the  note  must  be  presented  upon 
the  exact  day  of  maturity  if  the  indorsers  and  guarantors 
are  to  be  held  liable  under  these  contracts. 

A  maker  may  usually  pay  a  part  of  his  obligation  be- 
fore it  is  due.  It  often  happens  that  it  is  not  convenient 
to  pay  the  whole  amount  when  due,  in  which 
payment  case  e  no^er  may  take  a  part  and  grant  an 
extension  of  time  on  the  balance.  This  is  in 
reality  a  new  contract.  If  a  part  payment  is  made,  such 
payment  should  be  indorsed  on  the  back  of  the  note.  In- 
dorsement of  this  kind  requires  no  signature;  the  usual 
form  is,  "  Received  on  within  note,"  stating  the  amount 
and  date  of  payment.  An  ordinary  separate  receipt  does 
not  give  notice  to  a  purchaser  that  a  payment  has  been 
made.  A  receipt  indorsed  on  the  back  reduces  the  face  of 
the  note.  Only  payment  of  the  obligation  in  full — i.  e., 
payment  of  the  exact  amount  of  money  promised — will  sat- 
isfy its  conditions,  unless  the  payee  enters  into  a  new  con- 
tract whereby  he  agrees  to  accept  something  else  in  place  of 
the  money.  For  example,  suppose  the  maker's  check  were 
accepted.  Usually,  acceptance  of  a  check  and  the  surrender 
of  the  note  constitutes  a  new  agreement  whereby  the  payee 
relinquishes  his  right  to  receive  the  amount  of  money  prom- 
ised ;  the  consideration  for  the  relinquishment  or  cancelation 
of  the  contract  is  an  order  on  the  bank  to  transfer  funds 
from  the  account  of  the  maker  of  the  check  to  the  one  sur- 
rendering the  note.  Such  a  settlement  is  what  is  called  an 
"  accord  and  satisfaction  "  between  the  parties. 

If  there  is  a  controversy  as  to  the  amount  to  be  paid, 
the  maker  may  oifer  (i.  e.,  he  may  make  a  tender  of)  such 
an  amount  of  money  as  he  may  think  due.     If 
tender  this  is  refused,  and  a  court  to  whom  the  con- 

troversy is  referred  decides  that  the  correct 
amount  of  money  has  been  tendered,  the  maker  will  be 
entirely  released.  If,  again,  the  dispute  be  with  regard  to 


128  HOW  FUNDS  ARE  OBTAINED 

the  kind  of  money  offered,  the  maker  need  only  offer  that 
which  by  law  is  made  "  legal  tender "  for  the  payment  of 
debts.  In  the  United  States  gold  and  silver  coins  of  the 
United  States  and  greenbacks  are  "legal-tender"  money 
for  the  satisfaction  of  credit  contracts,  unless  some  other 
kind  of  money  is  specified  in  the  agreement ;  in  such  case, 
the  kind  promised  must  be  delivered  if  the  creditor  insists. 
It  often  happens  that  there  is  a  failure  and  refusal  on  the 
part  of  the  maker  to  meet  his  promises.  He  may  have  re- 
fused payment  because  he  was  unable  to  secure 
te,  ^ne  necessary  funds  ;  he  may  dispute  the  amount 
claimed  on  the  ground  of  failure  on  the  part  of 
the  payee  to  indorse  a  part  payment  already  made,  or  for 
some  other  reason  ;  he  may  seek  to  avoid  his  debt.  In 
any  case,  the  fact  of  failure  and  refusal  gives  to  the  payee 
a  "  right  of  action "  in  the  courts  not  only  against  the 
maker,  but  also  against  all  "  cosigners,"  "  indorsers,"  and 
"guarantors,"  to  compel  them  to  make  payment  of  the 
money  promised  and  for  which  they  became  surety. 


NEW  YORK,  189  . 

To   

You  are  hereby  notified  that  a  certain  note  made  by 

for  $ 

in  favor  of 

dated ,  and  by  you  indorsed  (or  guaran- 
teed), was  this  day  presented  to 

for  payment  and  payment  was  refused. 

[Signed]  


The  holder  of  a  note  which  has  been  indorsed,  or  the 
payment  of  which  has  been  guaranteed,  must  notify  the  in- 

dorser  or  guarantor  if  payment  is  not  made 
non-payment  wnen  due.  When  one  becomes  surety  for  the 

fulfilment  of  another's  credit  contract,  he  is 
entitled  to  know  of  the  non-payment  in  order  that  he  may 


SALES  OF  COMMERCIAL  CREDIT  129 

take  steps  to  protect  himself.  If  he  receives  no  notice  of 
non-payment  he  has  a  right  to  presume  that  the  contract 
has  been  met  and  that  lie  is  released  from  the  security. 
On  page  128  is  the  usual  form  of  written  notice  sent. 

This  right  to  have  demand  made  on  the  day  that  the 
note  is  due  and  to  notice  of  non-payment,  however,  may  be 
Waiver  of  waived  by  indorsers  and  guarantors  at  the  time 
demand  and  the  contract  is  entered  -nto.  "  Call-loan  "  notes 
notice.  ftnd  many  Q£  tlie  u  8uort.time  »  notes  teken  by 

banks  very  commonly  have  a  clause  in  the  instrument  of 
this  kind.  The  law  simply  protects  the  indorser  in  case  he 
does  not  sign  away  his  rights.  When  waiver  is  made  the 
contract  may  be  strictly  enforced  by  a  bona-jide  holder. 


$500.  LOGANSPORT,  INDIANA,  June  30,  1897. 

We,  or  either  of  us,  promise  to  pay  to  the  order  of 
John  Hartwell  Bates,  on  July  30,  1897,  the  sum  of  Five 
Hundred  Dollars,  with  interest  at  the  rate  of  6$  from 
date,  for  value  received. 

And  the  cosigners  and  guarantors  of  the  above  note 
hereby  severally  and  specifically  waive  all  rights  and  ex- 
emptions that  would  accrue,  for  failure  of  the  holder  to 
present  this  note  for  payment  when  due,  for  notice  of 
non-payment,  notice  of  protest  and  of  demand  upon  them 
for  payments,  in  case  this  waiver  and  exemption  had  not 
been  specifically  made.  LouJS  STRANGER< 

PETER  LONGFELLOW. 
JOHN  K.  CRANDALL. 


An  indorsed  or  guaranteed  note  which  is  presented  for 
payment  outside  of  the  jurisdiction  in  which  it  is  made,  and 
is  not  paid,  is  usually  protested;  this  is  done  to 
give  formal  evidence  that  the  note  was  present- 
ed for  payment  and  that  payment  was  refused.     Protest 
is  a  formal  declaration  made  by  a  notary  public  into  whose 


130  HOW  FUNDS  ARE  OBTAINED 

hands  a  note  has  been  placed  for  official  and  formal  presen- 
tation, together  with  a  formal  record  of  the  fact  by  the 
notary.  The  notary  usually  attaches  the  certificate  of  pro- 
test to  the  note;  he  may  also  mark  upon  the  face  of  the 
note  the  fact  of  its  dishonor.  When  a  note  is  sent  to  a 
bank  or  other  agent  for  presentation  and  collection,  the 
greatest  precaution  must  be  taken  before  protest ;  the  bank 


BeMehem.  Pa.,0*  , 

J%4rts€Z?£<^j£Sikty*  after  date  ^....promise  to 

^LJ^^^ 
THE  1ST  NATIoisLBiNK  OF  BETHLEHEM, 

r^airrf^ts^r-^-Trrrr^rr.: '......~.  ..../$. 'Dollars, 

without  defaliftiolifor  value  received. 


or  other  agent  should  never  have  it  put  into  the  hands  of 
a  notary  for  official  presentation  and  protest  until  it  is  made 
certain  that  the  non-payment  has  not  occurred  through 
mistake ;  usually  a  messenger  will  be  sent  out  with  the  note 

/t  fl     A    PHILADELPHIA,  Au*h   fl          190  / 

MV  <zfe^U^c/^    JV^t^j 


Centennial  IRatfonal  Bank 

I,  the  undersigned,  Notary  Public  for  the  Commonwealth  of  Penna. 

have  this  day  protested  a  .............  /vf^T^L        ..........................  ibr  $/<?OP.  .......... 

......  190/,  drawn  by 


(the  same  being  due,  demanded  and  refused),  and  you  as  endorser,  will 
be  looked  to  for  payment,  of  which  you  hereby  have  notice. 

D.  S.  LINDSAY.  Real  Estate  Broker. 

*»-Ple.«  notify  the  other  parties  No.  ,4  S<Mrth  Broiu,  Strert 

to  the  maker  to  make  formal  demand  before  turning  it  over 
to  a  notary,  even  though  the  aote  is  made  payable  at  the 


SALES  OF  COMMERCIAL  CREDIT 


13i 


bank.  For  self-protection,  banks  make  it  a  rule  to  protest 
all  paper  received  from  another  State  for  collection  which 
is  not  paid  when  due,  unless  ordered  not  to  do  so  by  the 


tflnitril    Dialer,  of 


//a  o  o£k 


BE  7T  KNOWN,  That  on  the  day  of  the  date  hereof,  at  the  request  of  THE  CENTENNIAL 
NAT.  BANK,  the  holder  of  the  original     TtoXZ  .  of  which  »  true  copy  is  above  written.  I,  the 

undersigned.  Notary  PuHu-fjr  the  CommornxMh  of  Ptmsyhanb.  by  lawful  authority  duly  commissioned  by 
tit  Governor  of  Penna.,  and  sworn,  residing  in   the '.City   of  Philadelphia,  during  the  usual  hours  of 

Jfor  such  purposes,  caused  the  same  to  be  presented  at 
£#44***. 
and  made  for  the  payment  thereof,  which  was  refused  and  answer  made 


Whereupon,  I,  the  said  Notary,  at  the  request-  aforesaid,  have  Protested,  and  do  hereby  solemnly 
frotftt,  against  all  pertona  and  every  party  concerned  therein,  whether  a*  Maker.  Drawer,  Drawee,  Acceptor, 
Payer,  Endorser,  Guarantee,  Surety,  or  otherwise  howsoever  against  whom  It  is  proper  to  protest,  for  all  Ex- 
change. Re-exchange,  Costs,  Damages  and  Interest  suffered  and  to  be  suffered  for  want  of  payment  thereof :— Of 
which  demand  and  refusal  I  have  duly  notified  the  parties  interested. 

the  City  of  Philadelphia, 


owner ;  one  wishing  not  to  have  protest  made  should  in- 
struct the  bank  to  that  effect.     Such  instructions  are  com- 
monly attached  to  the  left  end  of  a  note-form,  witli  the  in- 
10 


132  HOW  FUNDS  ARE  OBTAINED 

junction  that  the  instruction  is  to  be  clipped  off  before 
presentation. 

It  will  be  observed  that  the  notice  of  protest  is  sent  out 
by  the  notary  public,  to  the  maker  of  the  note  and  to  each 

of  its  indorsers  and  guarantors,  making  formal 
Notice  of        and  offidal  demand      The  form  of  noiice  used 

protest.  •     -r>  i         ... 

m  Pennsylvania  is  given  on  page  131. 

All  forms  of  credit  are  contracts  for  the  future  delivery 
of  money  which  have  been  "  sold  "  or  exchanged  for  some- 
Advantages  thing  else  of  value.  That  which  is  received  in 
and  disad-  exchange  or  "  paid  "  for  a  credit  contract  is 
Vusinggprom-  called  the  "  consideration  "  or  price.  A  prom- 
issory notes,  issory  note,  as  a  form  of  credit  contract,  has  the 
advantage  of  being  a  formal  agreement  expressed  in  writing 
and  signed  by  the  party  making  it,  as  well  as  by  the  ones  in- 
dorsing or  guaranteeing  it.  It  is  therefore  less  likely  to 
be  disputed,  and  more  likely  to  be  complied  with  than  is  a 
simple  verbal  promise,  for  which  there  is  no  written  evi- 
dence, or  a  memorandum  of  account  made  by  the  creditor 
and  not  signed  by  the  promisor.  Being  a  written  agree- 
ment also,  it  may  be  protested ;  such  public  dishonor  is 
likely  to  injure  the  credit  of  the  maker  and  cause  his  future 
offers  of  credit  to  be  less  salable ;  on  this  account  the 
maker  will  usually  be  more  prompt.  The  disadvantages  of 
a  promissory  note  are  found  in  the  fact  that  delivery  may 
not  be  enforced  till  the  note  is  due.  The  only  way  that 
the  holder  can  obtain  funds  on  a  note  not  due  is  to  sell  it 
again.  When  it  docs  come  due  the  maker  of  the  contract 
may  have  sold  everything  that  he  owns  and  thus  have  de- 
feated the  enforcement  of  the  contract.  An  open  account, 
on  the  other  hand,  is  due  at  any  time.  An  overdue  note 
(although  dishonored)  may  be  a  better  form  of  paper  for 
the  holder  to  obtain  funds  with  than  a  note  not  due,  be- 
cause action  for  collection  on  an  overdue  note  may  be  begun 
at  once.  But  a  note  that  has  been  acquired  after  it  is  due 
is  not  a  safe  investment ;  the  one  holding  it  can  not  raise 


SALES  OP  COMMERCIAL  CREDIT  133 

the  plea  of  "innocent  purchaser"  against  any  defense  which 
the  maker  might  have  raised  against  the  payee  if  it  had  re- 
mained in  his  hands.  Suppose,  for  example,  that  the  maker 
had  made  part  payment,  and  the  holder,  failing  to  indorse 
the  amount,  sold  it  after  maturity  without  knowledge  on 
the  part  of  the  purchaser  that  a  part  of  the  amount  had  been 
paid.  In  such  case  the  maker  would  be  allowed  to  set  up 
the  payment  as  a  defense  in  liquidation  of  the  amount. 

INSTRUMENTS  FOR  THE  COLLECTION  OF  CREDIT  ACCOUNTS 
The  commercial  account  has  already  been  discussed  in 
its  character  as  funds — i.  e.,  as  a  form  of  credit  used  for  the 
purpose  of  making  purchases  and  payments.  The  promis- 
sory note,  on  the  other  hand,  has  been  treated  as  a  form  of 
credit  used  to  obtain  funds.  Both  are  evidences  of  contracts 
for  the  future  delivery  of  money.  The  first  contract,  how- 
ever, is  one  for  which  there  is  no  evidence  except  the  mem- 
oranda or  memory  of  the  parties,  while  the  second  is  evi- 
denced by  a  writing  setting  out  the  contract  in  full,  signed 
by  the  party  obligated.  The  promissory  note,  therefore,  as 
has  already  been  observed,  serves  a  double  purpose:  (1)  by 
its  original  sale  the  maker  was  able  to  obtain  funds  for  his 
immediate  use;  and  (2)  the  note  being  a  signed  and  formal- 
ly executed  statement,  it  may  be  presented  to  the  maker 
for  payment;  it  thereby  saves  the  payee  for  funding  pur- 
poses by  resale  or  by  collection  under  the  contract  when 
it  comes  due.  To  restate  the  difference :  The  commercial 
account  has  for  its  end  the  purpose  of  serving  its  maker  as 
"  funds  " — as  means  of  purchase  or  payment ;  the  prom- 
issory note  performs  the  double  service  of  obtaining 
funds  for  present  use  for  its  maker,  and  that  of  obtain- 
ing funds  for  future  use  for  the  payee.  The  commercial 
account,  however,  being  a  contract  for  the  future  delivery 
of  money,  must  have  some  form  of  expression  of  this  side  of 
the  agreement.  There  is  no  written  evidence  of  the  con- 
tract for  payment  or  future  delivery.  In  exchange  for  it 


134 


HOW  FUNDS  ARE  OBTAINED 


goods  are  given  ;  how  will  the  one  who  has  given  goods  for 
this  form  of  credit  obtain  money  in  payment  under  the  con- 
tract ?  This  has  given  rise  to  a  whole  class  of  instruments 
of  collection. 

The  most  common  instrument  of  collection  is  the  account 
stated.  This  is  simply  a  copy  of  the  memorandum,  or  a 
statement  from  memory,  of  the  items  of  credit 
state™  S  an(^  amount  Deceived  in  exchange.  This  state- 
ment is  presented  to  the  purchaser  for  pay- 
ment. It  thus  becomes  an  instrument  in  the  hands  of  the 
one  receiving  the  credit,  which  is  used  to  obtain  funds  in 
payment  of  the  credit  given  in  exchange  and  for  which 
there  is  no  otber  evidence.  After  an  "account  stated  "  has 
been  presented  for  payment,  if  no  objection  is  made  to  the 
items  of  credit  contained  in  it,  it  is  taken  for  granted  that 
the  party  receiving  the  statement  accepts  it  as  correct. 


Mr.  JOSEPH  GRAYSON                    NEW  YORK,  July  1,  1897. 
To  JOHN  R.  BLACK, 
Dealer  in  Boots,  Shoes,  and  Gents'  Furnishings.     Dr. 

1897. 
June 
i< 

(t 
« 

2 
2 
2 
11 
11 
28 

One  pair  boys'  shoes 

$1 
5 
1 
1 

8 

00 
00 
50 
00 
50 
00 

One  pair  "  Rex  "  tan  boots  
Two  neckties 

1  Monarch  shirt 

2  pairs  black  hose  

1  pair  trousers               

Total,  June  account  

$17 

00 

In  the  above  exhibit  is  a  copy  of  memoranda  taken 
by  John  K.  Black  in  regular  course  of  business  with  Mr. 
Joseph  Grayson.  The  "account  stated,"  or  copy  of  his 
memorandum,  shows  that  on  June  2  Mr.  Black  received 
$1  of  Mr.  Grayson's  credit  for  a  pair  of  boys'  shoes, 


SALES  OP  COMMERCIAL  CREDIT 


135 


$5  of  his  credit  for  a  pair  of  "Hex"  tan  boots,  $1.50 
of  his  credit  for  two  neckties,  etc.  During  the  month  he 
had  received,  according  to  his  own  account,  $17  of  Mr. 
Grajson's  credit  in  exchange  for  goods.  He  now  "  states  " 
the  account  to  Mr.  Grayson — i.  e.,  presents  a  copy  of  memo- 
randa to  him  for  payment. 

The  fact  that  accounts  stated  are  simply  the  memoranda 

of  one  party  to  the  transaction  leaves  room  for  question  as 

to  their  accuracy.     For  example,  Mr.  Grayson 

may  den.F  that  ne  Save  $8  of  kis  credit  for 
the  trousers  purchased  on  June  28;  he  dis- 
putes the  account,  claiming  that  he  agreed  to  pay  only 
$7.50.  Mr.  Black's  clerk  may  recognize  the  mistake  and 
correct  the  error,  thereby  reducing  the  account  stated  to 
$10.50.  But  Mr.  Grayson  prefers  to  have  the  account 
stand  over  for  another  month  before  payment  of  the 
amount  acknowledged  to  be  due.  To  place  the  account 
stated  beyond  future  controversy,  and  to  show  that  the 
amount  due  has  been  settled  or  agreed  on,  Mr.  Grayson 
marks  on  the  face  of  the  statement  "  O.  K.,"  adding  his 
initials  "  J.  G."  Now  the  "  account  stated  "  takes  the  form 
of  a  written  contract  for  payment  of  $16.50.  At  the  be- 
ginning of  the  next  month  Mr.  Black  renders  a  new  state- 
ment of  account,  in  which  he  enters  the  amount  agreed  on 
as  balance  due  as  "  balance  as  per  account  stated,"  adding 
the  amounts  of  credit  purchases  subsequent  to  July  1.  In 


Mr.  JOSEPH  GRAYSON                NEW  YORK,  August  l,  1897. 

To  JOHN  K.  BLACK, 

Dealer  in  Boots,  Shoes,  and  Gents'  Furnishings.     Dr. 

July 
u 
u 

1 

14 

14 

Balance  as  per  account  stated. 
1  suit  of  clothes  

$16 
30 
5 

50 
00 
00 

1  Knox  hat 

Amount  due  August  1.  .  . 

$51 

50 

136  .   HOW  FUNDS  ARE  OBTAINED 

order  to  place  an  account  beyond  question,  and  at  the  same 
time  to  have  it  in  form  of  a  "  settled  account,"  bills  may  be 
rendered  at  the  time  the  purchase  is  made  or  long  before 
the  account  is  due ;  the  party  receiving  it  will  go  over  the 
items  for  the  purpose  of  correction,  and  then  return  the 
memorandum  with  a  statement  that  it  is  correct,  or  with 
"  O.  K."  marked  on  its  face  over  the  signature  of  the  one 
buying  on  credit.  The  account  is  then  in  form  for  col- 
lection when  due  the  same  as  a  promissory  note. 

r  rtu...^-.  _    Philadelphia,  January  \,  190  / 

g 


,- 
» 


*  o  ;       ^^T1?6  PmerieaQ  ppademy  of  political  a9d  Social  SeierjeefwT 

3  ?  ,  For  Annual  Dues  for  year  ending  December  $t,  19  6 1 ,  t$-oo. 


Received  payment, 


Accounts  may  be  puid  by  the  tender  of  the  amount  of 

money  due,  or  by  offer  and  acceptance  of  something  else, 

as,  for  example,  the  acceptance  of  a  "set-off," 

pa!d"Ht          a  "draft"  for  the  amount,  a  "check,"  or  a 

"due-bill."     The  payment  is  very  commonly 

evidenced   by  a  "receipt,"  or  a  written  statement  of  the 

fact  of  payment  received. 

If  one  has  a  claim  against  another  who  also  has  a  claim 
against  him,  this  claim  is  called  a  set-off — that  is,  something 

A  set-off          to  set  or  cance'  °ff  Part  °f  ms  daim.    Under  or- 
dinary conditions  it  is  impossible  to  have  a  set- 
off  against  a  note  not  in  the  hands  of  the  original  payee,  but 
with  mutual  accounts  it  is  the  common  method  of  payment. 
A  due-bill  is  a  written  acknowledgment  or  evidence  of 
a  due  account.     The  ordinary  form  of  due-bill  is  not  nego- 
Due-bills         tiable,  as  it  is  not  made  payable  "  to  order."     It 
differs  from  a  promissory  note  in  another  par- 
ticular, viz.,  that  it  may  be  made  payable  in  merchandise, 


SALES  OF  COMMERCIAL  CREDIT  137 


$51.50.  NEW  YORK,  August  1,  1897. 

Upon  settlement  of  account,  this  day,  with  John  R. 
Black,  I  acknowledge  the  sum  of  Fifty-One  Dollars  -fifa 
to  be  due  and  owing  to  him  by  me. 

JOSEPH  GBAYSON. 


A  commercial  draft  is  an  instrument  for  the  collection 
of  funds,  through  a  third  party,  due  on  account.  It  is  in 

the  form  of  a  letter  from  the  person  to  whom 
drafts*™  an  account  is  due,  directed  to  the  party  owing 

an  account,  requesting  him  to  pay  the  amount 
of  the  draft  to  a  third  person  and  to  charge  the  same  to 
the  account  of  the  writer.  For  example :  one  Jacob  Ross 
has  purchased  from  William  Jones  $500  worth  of  merchan- 
dise on  account,  to  be  paid  on  November  1,  1898.  On 
October  30,  Lawrence  Williams  presents  an  "  account 
stated  "  to  William  Jones  for  $300,  and  demands  payment. 
Jones  has  not  the  money,  but  tells  Williams  that  Ross  is 
owing  him  $500  due  on  November  1.  Williams  thereupon 
offers  to  take  a  draft  on  Ross  for  $300  in  payment  of 
Jones's  account  to  himself  (Williams),  which  is  agreed  to 
by  Jones.  He  thereupon  writes  to  Ross  as  follows  : 


SPRINGFIELD,  MASSACHUSETTS,  October  30,  1898. 

To  JACOB  Ross: 

After  November  1,  please  pay  to  Lawrence  Williams 
Three  Hundred  Dollars,  and  charge  to  the  account  of 
$300.S2;  WILLIAM  JONES. 


Upon  the  receipt  of  this  letter,  Williams  "  receipts "  the 
account  against  Jones.  He  presents  the  draft  to  Ross 
and  receives  payment ;  Ross  charges  the  amount  to  Jones's 
account.  It  will  appear  from  this  that  the  draft  on  Ross 
not  only  serves  Williams  as  an  instrument  of  collection  of 


138  HOW  FUNDS  ARE  OBTAINED 

his  account  against  Jones,  but  it  also  serves  Jones  as  funds 
for  the  payment  of  his  account  to  Williams.  This  double 
relation  is  always  found  in  a  draft.  It  is  primarily  an  in- 
strument for  the  collection  of  funds  in  the  hands  of  the 
one  receiving  it,  but  it  serves  the  party  making  the  draft 
as  funds  for  the  purpose  of  payment  "  on  account."  It 
often  happens  that  a  party  living,  let  us  say,  in  Boston,  owes 
another  party  in  New  York.  The  New  York  party,  wish- 
ing to  collect  the  amount  due  on  account  from  the  Boston 
man,  will  "  draw  on  him  "  through  his  bank.  The  bank's 
correspondent  in  Boston  will  present  the  draft,  upon  the 
payment  of  which  the  amount  will  be  placed  to  the  account 
of  the  drawer.  The  New  York  man  will  be  considered  as 
having  made  a  payment  to  his  bank  "  on  account "  by  draw- 
ing on  the  Boston  customer  who  owes  him. 

When  a  bill  or  draft  is  drawn  on  some  one  living  in  a 
foreign  country,  it  is  usually  drawn  in  duplicate  or  tripli- 

Forei  n  bills    CEte'  &°  *^at  ™   Ca86  °n6  *8  ^°St  *^6  otner  w^ 
reach  the  party  to  whom  it  is  addressed.     This 

grows  out  of  the  increased  uncertainty  of  delivery  of  a  foreign 
bill.  In  the  foreign  bill,  more  clearly  than  any  other,  appears 
the  true  nature  of  the  instrument.  Primarily,  it  is  a  simple 
request.  It  is  not,  when  drawn,  a  credit  instrument.  Sev- 
eral requests  may  be  made  at  the  same  time  for  the  same 
funds.  No  promise  or  contract  for  the  delivery  of  money 
may  be  found  in  a  draft  before  it  is  presented.  The  whole 
credit  quality  of  a  bill  depends  on  "  acceptance  " — i.  e.,  on 
the  undertaking  of  the  one  of  whom  the  request  is  made 
to  make  payment  to  the  party  presenting  it.  The  accom- 
panying exhibit  is  the  "  First "  of  exchange,  drawn  by  the 
Bank  of  the  United  States,  January  25,  1838.  This  was 
one  of  three  bills  of  like  "  tenor  and  date,"  each  bearing 
on  its  face  the  stamp  of  its  relation  and  significance.  On 
the  left  end  of  the  exhibit  is  engraved  "  First."  Each  of 
the  other  two  had  engraved  upon  it  "  Second  "  and  "  Third," 
respectively.  The  Bank  of  the  United  States,  through 


SALES  OF  COMMERCIAL  CREDIT 


139 


its  President, 
Nicholas  Eid 
die,  and  its  cash- 
ier, J.  Cowper- 
thwait,  issued 
three  bills 
requesting  S. 
Laudon,  of 
London,  to  pay 
to  M.  Robin- 
son £1,000,  and 
charge  the  same 
to  the  account 
of  the  drawer. 
This  payment 
was  requested 
"sixty  days  af- 
ter sight "  of 
the  bill  first 
presented.  The 
"First"  was 
presented  on 
May  4,  nearly 
three  months 
after  the  three 
bills  were 
drawn.  Dur- 
ing all  of  this 
time  there  had 
been  no  obliga- 
tion on  the  part 
of  Laudon,  of 
London,  to  pay 
the  amount. 
On  that  day, 
however,  he 


r  c 


140  HOW  FUNDS  ARE  OBTAINED 

"  sighted  "  the  "  First,"  and  wrote  on  its  face  his  acceptance 
— i.  e.,  S.  Laudon  undertook  to  pay  £1,000  to  the  one  pre- 
senting it  sixty  days  hence.  The  bill  at  that  moment,  and 
not  till  then,  became  a  credit  instrument — a  promise  to  pay 
a  definite  sum  of  money  at  a  definite  time.  The  "  first " 
request  having  been  honored,  the  acceptance  of  either  the 
"  second  "  or  the  "  third  "  would  have  been  at  the  risk  of 
the  acceptor  and  not  of  the  drawer,  as  the  request  was  for 
the  payment  of  £1,000  only  and  not  for  £3,000. 

A  sight-draft  is  one  requesting  payment  at  the  time 
that  it  is  presented.  Let  us  suppose  that  Louis  Borg  had 
an  account  against  Patterson  &  Co.,  of  Phila- 
delphia.  He  wishes  to  pay  an  account  to  Peter 
Sterling  for  $500.  He  draws  on  Patterson  & 
Co.  for  the  amount  payable  "at  sight."  A  time-draft  is 
one  made  payable  on  a  certain  day,  as,  for  example,  "on 
November  1,"  or  a  certain  length  of  time  after  presentation 


$500.  PITTSBURG,  PENNSYLVANIA,  January  23,  1899. 

At  sight  pay  to  the  order  of  Peter  Sterling  Five  Hun- 
dred Dollars,  value  received,  and  charge  to  the  account  of 

To  Messrs.  PATTERSON  &  Co.,  LOUIS  BORG. 

Philadelphia. 


for  acceptance.     It  is  very  common  to  make  a  draft  payable 
ten  days,  or  thirty  days,  "  after  sight."     The  time  of  pay- 
ment of  the  draft  is  usually  governed  by  the 
Time-draft.  ,._,.  ,  ,    *    &  1.^*1 

conditions  of  payment  of  the  account  for  the 

collection  of  which  it  is  drawn.  If  a  bill  of  goods  were 
payable  ten  days  after  delivery,  then  a  draft  might  be  drawn 
and  sent  at  the  time  that  the  goods  were  sent,  to  be  pre- 
sented for  acceptance  on  delivery  of  the  goods,  but  not  pay- 
able till  ten  days  afterward. 

The  acceptance  of  a  draft,  like  the  "  O.  K."  of  an  ac- 
count, makes  it  a  written  evidence  of  debt  against  the  one 
accepting  it ;  it  is  then  in  the  nature  of  a  promissory  note, 


SALES  OF  COMMERCIAL  CREDIT  141 

to  which  the  drawer  becomes  the  indorser,  and  the  acceptor 
is  the  principal  party  to  the  contract.  Acceptance  is  made 
by  writing  across  the  face  the  word  "  Accepted,"  together 
with  the  name  of  the  party  accepting.  It  is  usually  dated,  and 
very  often  the  place  where  payment  will  be  made  is  added. 
If  the  place  of  payment  is  not  entered,  it  is  payable,  like  a 
promissory  note,  at  the  office  of  the  acceptor.  When  the 
one  on  whom  the  draft  is  drawn  accepts  it,  he  is  said  to 
"  honor  "  it.  If  not  accepted  or  paid,  it  is  not  more  bind- 
ing on  him  than  a  letter  or  oral  request  would  be.  His  re- 
fusal to  honor  drafts  made  for  the  payment  of  accounts  due, 
however,  will  injure  his  credit  in  the  community — i.  e., 
make  it  less  salable  in  the  future — and  thereby  will  handi- 
cap him  in  using  credit  as  capital  in  his  business. 

A  draft,  before  acceptance,  ^s  much  like  a  promissory 
note  that  has  been  negotiated  before  it  is  executed.     It  is 

taken  by  the  payee,  or  his  assignee,  on  the  faith 
Security  for  .  ,  J  '  /  '  .«  ,  e  .  -,  r™  • 

acceptance  °r  judgment  that  it  will  be  accepted.  Ihis 
and  payment  judgment  is  based  on  the  contract,  or  contracts, 

of  security  that  go  with  and  are  attached  to  or 
made  a  part  of  the  bill  at  the  time  that  it  is  drawn.  As  in 
the  case  of  the  promissory  note,  the  contracts  of  security 
are  of  two  kinds,  viz.,  (1)  personal  security  and  (2)  lien 
security.  Unlike  the  promissory  note,  however,  the  con- 
tracts of  security  are  for  both  acceptance  and  for  payment. 
In  the  first  place,  the  drawer  enters  into  a  contract  (not 
written,  but  understood  and  enforced  by  law)  at  the  time 
that  the  bill  is  drawn  by  which  he  guarantees  that  the 
drawer  will  both  accept  it  and  pay  the  amount  when  due. 
To  this  may  be  added  still  other  personal  security  by  "  in- 
dorsement "  or  "  guarantee."  But  since  the  bill  is  negoti- 
ated and  enters  the  channels  of  trade  before  the  credit  con- 
tract has  been  executed,  since  it  is  offered  for  discount  and 
exchange  in  a  foreign  land,  personal  security  may  not  be 
considered  sufficient.  A  foreign  exchange  house  will  usually 
require  that  collateral  or  lien  security  be  added  to  the  con- 


142 


HOW  FUNDS  ARE  OBTAINED 


tracts  of  personal  securities.  These  collateral  contracts  may 
be  offered  as  security  for  acceptance  only,  or,  as  in  case  of 
"  sight-drafts,"  for  both  "  acceptance  "  and  "  payment." 


5 

2 
§ 


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sscr 

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s§ 

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s  §  s  §  § 

§  s  a  "  s 


s  s  z  -g  s  - 

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SALES  OF  COMMERCIAL  CREDIT 


143 


A  draft  thus  secured  is  called  a  "documented  bill." 
The  exhibit  here  offered  is  of  such  a  bill  "  secured  of  ex- 


'  In  lUitiK-s-5  Whereof.  ••    -.-       —- .      ^  -' •  • -•  - 

!_»*«*..  t.ra,«WtJ-.i,,k,^««  ««»*««.  ,          ^^    __          , 


change,"  drawn  by  Burnham,  Williams  &  Co.,  of  Phila- 
delphia, on  the  Peruvian  Corporation,  Ltd.  The  Baldwin 

Locomotive  Works  had  sold  a  consignment  of 
men°ed~bill.  machinery  to  the  Peruvian  Corporation.  At 

the  time  the  goods  were  shipped,  invoices  were 
taken  to  the  office  of  the  Panama  Railroad  Co.,  and  bills  of 


SALES  OF  COMMERCIAL  CREDIT 


lading  were  taken 
out  by  Burnham, 
Williams  &  Co. 
in  favor  of  them- 
selves— i.  e.,  they 
shipped  the  con- 
signment by  the 
steamer  Orizaba  to 
their  own  order, 
and  had  five  copies 
of  the  bill  of  la- 
ding made  out.  At 
the  same  time  du- 
plicate ninety-day 
drafts  were  drawn, 
and  an  insurance 
policy  was  pur- 
chased from  Lloyds 
to  protect  the  prop- 
erty against  loss. 
These— the  in- 
voices, the  bills  of 
lading,  the  insur- 
ance polu-y,  and 
the  two  drafts— 
were  taken  to 
Brown  Brothers  & 
Co.  for  discount. 
Satisfactory  ar- 
rangements having 
been  made  for  the 
sale  of  the  bills, 
Burnham,  Wil- 
liams &  Co.  in- 
dorsed and  assigned 
them  all  over  to 


146  HOW  FUNDS  ARE  OBTAINED 

Brown  Brothers  &  Co. ;  that  is,  they  executed  a  contract  or 
bill  of  sale  to  Brown  Brothers  &  Co.,  with  instructions  "  that 
if  the  said  bill  be  accepted,  the  bills  of  lading  are  to  be  given 
up  to  the  Peruvian  Corporation,  Ltd.,  without  prejudice," 
but  "  if  the  Peruvian  Corporation,  Ltd.,  declines  to  accept," 
then  Brown  Brothers  &  Co.  were  authorized  to  retain  the 


6/ 


bill  of  lading  and  to  place  the  said  material  at  any  time 
in  the  hands  of  their  brokers  for  sale  at  their  discretion, 
and  to  charge  all  expenses,  including  commissions  for  sale 
and  guaranty,  and  to  apply  the  proceeds  on  or  toward  pay- 
ment of  the  draft  for  account  of  whom  it  may  concern.  In 
negotiating  a  documented  bill,  it  is  necessary  that  all  copies 
of  drafts  and  documents  be  turned  over  to  the  party  buying 
it,  otherwise  a  stranger  having  duplicates  might  forestall 
the  owner  and  defraud  the  parties  in  interest.  It  is  to  be 
noted  that  the  collateral  here  given  was  in  the  nature  of 
security  for  "  acceptance,"  only.  After  acceptance,  the 
only  contracts  remaining  were  the  credit  contract,  or  prom- 
ise to  pay  on  the  part  of  the  Peruvian  Corporation,  Ltd., 
and  the  personal  security  of  Burnham,  Williams  &  Co.  and 


SALES  OF  COMMERCIAL  CREDIT  147 

their  indorsers  for  payment  of  the  credit  contract  ninety 
days  after  acceptance. 

The  indorsements  and  other  collateral  contracts  of  se- 
curity attached  to  drafts  make  these  instruments  of  high 
Secured  commercial  value.  In  the  negotiating  of  for- 
drafts  used  eign  bills,  such  precautions  are  taken  that  one 
as  funds.  house  doing  several  millions  of  this  kind  of 
business  per  annum  has  the  phenomenal  record  of  having 
lost  only  $600  during  forty  years  of  dealing.  By  sale  of 
his  draft  on  New  York,  the  St.  Louis  merchant  is  en- 
abled to  obtain  funds  with  which  to  pay  for  grain  sold. 
On  receipt  of  the  grain  by  the  New  York  merchant,  he 
may  at  once  trans-ship  it  to  a  Liverpool  customer,  and  on 
his  bills  of  lading  draw  for  the  amount.  By  sale  of  this  he 
obtains  funds  with  which  to  meet  the  St.  Louis  draft.  The 
Liverpool  merchant  meets  the  draft  on  him  by  drawing  on 
a  Belfast  brewer,  who  settles  the  draft  on  him  by  a  bill  on 
a  New  York  importer  of  Irish  stout.  These  international 
drafts  or  bills  are  settled  by  setting  one  off  against  another. 
Americans  having  accounts  to  meet  in  London,  buy  drafts 
against  England,  and  Englishmen  having  American  ac- 
counts to  meet  will  buy  drafts  against  New  York.  These 
secured  bills,  in  their  capacity  as  instruments  for  the  col- 
lection of  funds  due  "  on  account,"  come  to  serve  in  the 
capacity  of  funds  for  the  payment  of  other  accounts  and 
avoid  the  necessity  of  shipping  money  from  place  to  place 
in  payment  of  credit  obligations. 

Drafts  which  are  not  paid  at  the  time  for  which  accept- 
ance is  made,  or  which  are  not  accepted,  may  be  protested. 
«•  In  fact,  this  is  the  usual  custom  when  instruc- 

ment  and  tions  are  not  given  to  the  contrary.  The  pro- 
protest.  j.eg£  o£  a  kin  putg  on  its  face  notice  of  its  dis- 

honor, and  thereafter  it  ceases  to  serve  as  funds.  No  one 
will  receive  it  in  payment.  It  will  be  returned  to  the  party 
drawing  it,  and  he  will  be  required  to  make  good  the  amount, 
and  pay  all  costs  and  expenses.  When  the  drawer  does  not 
11 


148  HOW  FUNDS  ARE  OBTAINED 

wish  to  incur  the  expense  of  protest,  he  will  have  printed 
or  attached  to  the  end  of  the  draft  a  detachable  slip  with 
the  words,  "  No  protest.  Tear  this  off  before  presenting" 
This  is  in  the  nature  of  private  advice  to  one  presenting. 
Except  as  between  the  most  reputable  houses,  such  drafts 
are  not  taken  as  readily  in  exchange  for  the  reason  that  the 
very  instruction  itself  may  cast  suspicion  on  the  value  of 
the  paper. 


CHAPTER  VIII 
FUNDS  OBTAINED  BY  SALES  OF  LONG-TIME  PAPER 

THE  credit  instruments  thus  far  described  are  those 
commonly  used  as  a  means  of  obtaining  funds  for  current 
use — i.  e.,  for  commercial  transactions ;  they  are  generally 
referred  to  as  short-time  or  commercial  paper.  When  funds 
are  desired  for  more  permanent  use  quite  a  different  ar- 
rangement must  be  made.  Instead  of  the  credit  being  due 
on  demand,  or  in  thirty,  sixty,  or  ninety  days,  it  is  made 
payable  in  five,  ten,  twenty,  or  perhaps  fifty  years.  This 
precludes  the  use  of  accounts ;  it  makes  necessary  a  definite 
or  formal,  written  contract — one  which  will  place  the  terms 
and  amount  promised  beyond  all  question.  In  form,  all 
the  instruments  used  for  long-time  credit  transactions  are 
in  the  nature  of  promissory  notes.  The  credit  contract 
itself  does  not  differ  from  the  commercial  note  except  as  to 
time  of  maturity ;  the  essential  difference  between  long- 
time and  short-time  paper  is  found  in  the  contract  of 
security  given.  One  can  make  a  conservative  business 
Form  of  judgment  of  the  value  of  a  promise  to  deliver 
long-time  money  thirty  or  sixty  days  hence ;  in  this  the 
personal  ability  of  the  one  offering  his  credit 
for  sale  to  obtain  funds  with  which  to  redeem  it,  and  ques- 
tions of  integrity,  can  be  determined  with  practical  cer- 
tainty. The  incidents  and  accidents  of  life,  and  the  shifting 
fortunes  of  business,  however,  make  uncertain  all  judgments 
of  personal  condition  to  deliver  funds  twenty  years  hence ; 
judgment  as  to  the  value  of  a  contract  for  the  delivery  of 

149 


150  HOW  FUNDS  ARE  OBTAINED 

money  twenty  years  hence,  one  which  rests  on  personal 
ability  and  integrity  alone,  must  be  unfavorable.  The  credit 
contract  in  itself  would  be  little  valued ;  the  one  to  whom 
it  was  offered  in  exchange  for  funds  would  refuse  to  buy  it. 
A  contract  of  security  is  added.  Uncertainty  being  thus 
obviated,  the  long-time  credit  may  be  sold. 

'  To  illustrate  the  different  characters  and  uses  of  long- 
and  short-time  credit:  Edward  Strong  and  Leonard  Wil- 
Tllustrations  ^ams  decide  to  engage  as  partners  in  a  general 
of  difference  grocery  business  at  West  Point,  on  the  Hudson. 

ts/sof'long-  Each  has  $ 1'000  to  Put  into  the  enterprise. 
and  short-  This  will  give  the  firm  $2,000  as  cash  capital. 
time  paper.  -gut  they  have  no  stock;  they  have  no  store 
building,  no  office  fixtures,  no  counters  or  shelves,  and  no 
provision  made  for  service.  Besides,  they  estimate,  a  stock 
worth  $2,000  would  be  too  small  a  one  to  give  profitable 
employment  to  themselves  or  to  their  capital.  They  need 
a  stock  of  goods  that  will  cost  from  $3,000  to  $5,000,  a 
building,  and  other  business  equipment.  How  shall  they 
obtain  the  funds  ?  By  consultation  with  the  West  Point 
National  Bank  they  find  that  funds  may  be  obtained  there 
to  finance  their  stock  purchases ;  an  arrangement  is  made 
through  the  president  and  cashier  of  the  bank  whereby  the 
grocers  are  to  keep  their  account  with  them,  and,  on  bills 
being  presented  for  stock  purchases,  Strong  &  Williams 
will  execute  their  promissory  notes,  the  bank  to  give  the 
firm  a  credit  on  its  books  in  exchange  for  stock  notes  to 
an  amount  not  to  exceed  $5,000,  as  occasion  may  require. 
As  a  part  of  the  agreement,  the  grocery  company  is  to 
"deposit"  all  cash  received  from  customers — all  money 
and  checks  received  from  sales  as  fast  as  they  are  made. 
This  arrangement  will  enable  Strong  &  Williams  to  buy 
for  cash,  and  to  take  advantage  of  the  trade  discounts 
offered  by  the  wholesale  house.  The  notes  are  to  be  made 
payable  on  or  before  ninety  days,  for  the  reason  that  it 
is  estimated  that  the  stock  will  be  turned  over,  or  sold, 


SALES  OP   LONG-TIME  PAPER  151 

once  every  three  months.  In  such  a  transaction  the  bank 
requires  no  security ;  it  is  willing  to  rely  on  the  integrity 
of  the  partners  and  their  ability  to  make  payments  out  of 
sales — in  other  words,  it  is  willing  to  rely  on  their  unse- 
cured credit.  Strong  &  Williams  now  have  established 
a  line  of  credit  good  for  $5,000  for  stock  purchases,  and, 
besides,  they  have  their  original  $2,000  for  working  capital. 
But  how  about  a  building  and  other  equipment  ?  A  well- 
located  store-room  is  found  which  they  may  rent  at  $50  per 
month — $600  per  year.  Just  across  the  street  is  a  vacant 
lot,  however,  which  may  be  purchased  for  $1,000.  If  they 
buy  this  vacant  lot  instead  of  renting  the  store-room,  they 
can  put  up  a  suitable  one-story  building  for  $1,000  more. 
The  whole  property  will  cost  only  $2,000  ;  the  interest  on 
this  will  be  $100  per  annum.  By  such  an  arrangement 
there  will  be  a  clear  gain  of  $500  per  year.  They  decide 
to  buy  the  lot  for  $1,000,  and  to  spend  the  other  $1,000  of 
the  original  capital  for  a  building.  But  having  done  this 
they  have  no  funds  left.  To  complete  their  equipment, 
some  provision  must  be  made  for  current  funds.  Current 
expenses  must  be  paid  ;  the  partners  themselves  must  live ; 
they  must  pay  clerks,  delivery,  obtain  supplies  of  fuel,  meet 
incidental  expenses,  etc.  At  least  $1,000  more  of  perma- 
nent capital  is  required  before  they  are  ready  to  begin 
business.  The  West  Point  National  Bank  is  willing  to  take 
their  short-time  notes  for  funds  with  which  to  make  stock 
purchases,  but  it  is  not  willing  to  contribute  permanent 
capital — its  own  business  is  so  organized  that  it  must  be  able 
to  collect  funds  whenever  demands  are  made  by  depositors. 
The  problem  of  getting  more  permanent  funds  is  solved  by 
arrangement  with  the  Dime  Savings-Bank.  This  institution 
is  willing  to  give  Strong  &  Williams  $1,000  for  their  note, 
due  five  years  hence,  bearing  interest  at  the  rate  of  4£  per 
cent  and  secured  by  a  mortgage  on  the  building  and  lot. 
Current  funds  being  provided  for  in  this  manner,  they  take 
the  $1,000  received  from  the  sale  of  the  mortgage  note,  de- 


152 


HOW  FUNDS  ARE  OBTAINED 


posit  it  in  the  West  Point  National  Bank,  order  a  $3,000 
Btock  of  groceries  in  New  York,  execute  ninety-day  notes 
for  this  amount,  and  pay  for  the  goods  by  check  on  their 
account  at  the  bank;  they  begin  business,  make  payments 
to  the  bank  from  sales,  and  execute  new  notes  for  add- 
ing to  and  enlarging  their  stock  as  trade  and  sales  may 
require. 

If  we  look  at  the  balance-sheet  of  the  Strong- Williams 
Company  on  the  day  that  they  first  received  their  $3,000 
stock  and  paid  for  it,  the  following  financial  summary  would 
appear : 


BALANCE  SHEET,  July  1,  1897. 

ASSETS   (or   business  equip- 
ment procured  by  expend- 
iture of  the  funds  contrib- 
uted). 
Store    building    and 
lot                                $2,000 

LIABILITIES  (for  funds  con- 
tributed). 
By  Proprietors: 
Edward  Strong.  .  .   $1,000 
Leonard  Williams.     1,000 
By  Creditors: 
The  Dime  Savings- 
Bank,  Mortgage 
Loan  1,000 

Stock  3,000 

Cash  (West  Point  Na- 
tional Bank)  1,000 

Total  value  of  assets  .   $0,000 

Loans,  West  Point 
National  Bank..     3,000 

Total  liabilities..   $6,000 

This  gives  a  picture  of  the  financial  arrangement,  the 
sources  from  which  $6,000  of  funds  were  procured  for  the 
enterprise,  and  the  equipment  procured  by  the  use  of  these 
funds.  From  this,  it  appears  that  $2,000  were  contributed 
by  the  proprietors  themselves,  while  $4,000  came  from  the 
creditors  of  the  concern.  Of  the  credit  sold  (as  a  means  of 
obtaining  these  $4,000)  that  for  $3,000  was  in  the  form  of 
short-time  (commercial)  credits,  and  that  for  $1,000  was  a 
long-time  credit  contract  secured  by  mortgage. 


SALES  OP  LONG-TIME  PAPER  153 

There  are  two  classes  of  long-time  credits,  viz.,  "mort- 
gages "  and  "  bonds"  Each  class  may  have  the  same  kind  of 
Classes  of  security,  but  the  first  takes  its  name  from  the 
long-time  contract  of  security,  the  second  from  the  char- 
acter of  the  note  or  credit  contract  given.  It  is 
stated  that  each  may  have  the  same  kind  of  security.  This 
follows  as  a  necessity  from  the  length  of  time  agreed  upon 
for  payment.  Each  requires  that  the  ultimate  performance 
of  the  credit  contract  be  assured,  and  any  security  which 
would  be  sufficient  to  assure  the  payment  of  one  form  of 
long-time  credit  obligation  would  be  sufficient  for  the  other. 
The  difference  in  the  two  classes  of  instruments  arises  from 
the  advantages  of  sale  of  the  credit  contracts  secured,  and 
from  the  form  which  the  credit  "  issue  "  takes.  When  it  is 
desired  to  have  the  secured  obligation  for  future  delivery  of 
money  divided  into  a  large  number  of  small  credit  con- 
tracts, and  sold  separately,  a  bond  issue  will  be  resorted  to ; 
if  one  party  is  found  who  is  willing  to  purchase  the  whole 
amount  secured  and  hold  it  in  lump  sum,  or  in  the  form  of 
a  few  large  credit  contracts,  the  "  mortgage  "  will  be  offered. 

MORTGAGES 

That  which  commonly  goes  in  the  security  market  as  a 
"  mortgage  "  is  a  misnomer ;  it  is  in  reality  a  credit  obliga- 
tion secured  by  a  mortgage.  The  mortgage  is  only  a  part 
of  the  thing  bought  and  sold  ;  in  fact,  if  one  held  only  the 
"  mortgage  "  or  security  contract  it  would  be  of  little  value. 
The  promise  for  the  ,  delivery  of  money  is  found  in  a 
"  promissory  note  "  or  other  evidence  of  debt.  The  mort- 
gage is  only  a  collateral  contract  which  gives  to  the  creditor 

a  contract  of  lien  on  the  property  named  as 
"mortgage"?  security  for  the  payment  of  the  contract  of 

credit.  If  there  are  several  credit  contracts 
secured  by  the  same  mortgage,  these  may  be  sold  to  dif- 
ferent persons,  and  the  one  who  holds  the  mortgage  will 
be  held  to  be  the  trustee  for  them  all.  When  the  credit 


154  HOW  FUNDS  ARE  OBTAINED 

contracts  are  paid  the  mortgage  has  no  further  validity,  and 
may  be  declared  void  if  action  is  brought  to  clear  the  title 
to  the  property  against  which  it  is  given.  There  is  no  more 
reason  for  the  secured  debt  of  one  individual  (or  of  a  part- 
nership,) being  called  a  "  mortgage  security  "  than  there  is 
for  the  debt  of  a  corporation  issuing  bonds,  except  that 
usually  the  mortgages  and  credit  contracts  are  kept  together. 
The  term  "  mortgage,"  however,  is  sanctioned  by  commercial 
usage,  instead  of  the  descriptive  phrase,  "  a  credit  contract 


$1,000.22;  WEST  POINT,  NEW  YORK,  June  L  1897. 

Five  years  after  date  we  and  each  of  us  promise  to  pay 
to  the  Dime  Savings-Bank  of  West  Point,  or  order,  for 
value  received,  One  Thousand  Dollars,  with  interest  pay- 
able annually,  on  June  1  of  each  year,  at  the  rate  of  4£$ 
per  annum. 

This  note  is  secured  by  mortgage,  of  even  date  here- 
with- EDWARD  STRONG. 

LEONARD  WILLIAMS. 


secured  by  a  mortgage."  A  mortgage  is  a  contract  which 
gives  to  the  one  in  whose  favor  it  is  made  the  exclusive 
right,  on  default,  to  sell  the  property  named  in  it,  as  a  means 
of  procuring  funds  with  which  to  pay  the  credit  contract 
thus  secured.  In  form,  the  mortgage  is  a  conveyance  of 
property,  with  the  condition  that  if  the  debt  is  paid  the 
conveyance  is  to  become  void.  When  stripped  of  its  legal 
phrases  it  is,  in  substance,  as  shown  on  page  155. 

It  will  be  noted  that  the  contract  is  one  of  sale.  It  is, 
in  fact,  a  deed  to  the  property,  and  if  a  regular  deed  is 
drawn  to  which  the  condition  of  security  for  payment  is 
added,  the  mortgage  will  be  complete.  By  making  the 
mortgage  a  conditional  sale,  and  making  the  sale  a  matter 
of  public  record,  so  that  the  public  may  have  notice  of  the 
transaction,  Strong  &  Williams  can  not  sell  the  property 
to  any  one  else  and  pass  a  good  title.  This  guarantees  to 


SALES  OF  LONG-TIME  PAPER  155 


This  contract  witnesseth  :  That 

WHEREAS,  Edward  Strong  and  Leonard  Williams  have 
this  day  executed  their  promissory  note  to  the  Dime  Sav- 
ings-Bank  of  West  Point,  or  order,  for  the  sum  of  One 
Thousand  Dollars,  due  five  years  from  date,  with  interest 
at  the  rate  of  4|$  ; 

Now,  THEREFORE,  the  said  Edward  Strong  and  Leon- 
ard Williams,  in  consideration  of  the  aforesaid  One  Thou- 
sand Dollars  to  them  in  hand  paid,  as  evidenced  by  said 
promissory  note,  and  for  the  securing  of  the  payment  of 
the  same  unto  the  said  Dime  Savings-Bank,  or  its  as- 
signs, have  sold  and  conveyed  to  the  said  Dime-Savings 
Bank  of  West  Point  the  following  described  property,  to 
wit :  Lot  numbered  246,  in  Block  numbered  36,  on  Lau- 
rel Street,  in  the  Town  of  West  Point,  in  the  State  of 
New  York,  according  to  official  plate  thereof,  filed  for 
record  in  the  office  of  the  Auditor  of  the  County  of  Kings, 
in  the  State  of  New  York. 

The  condition  of  this  contract  is,  that  if  the  said 
Edward  Strong  and  Leonard  Williams  shall  pay  to  the 
said  Dime  Savings- Bank,  or  its  assigns,  the  sum  or  sums 
promised  in  said  note  according  to  the  tenor  thereof,  then 
this  contract  shall  be  null  and  void,  otherwise  to  remain 
in  full  force  and  effect. 

IN  WITNESS  WHEREOF  we  have  hereunto  set  our  hands 
and  seals  this  1st  day  of  July,  1897. 

EDWARD  STRONG.          [Seal] 
LEONARD  WILLIAMS.     [Seal] 

(  LINCOLN  STETSON. 
Witnesses :  \ 

(  JOHN  M.  BROMLEY. 


156  HOW  FUNDS  ARE  OBTAINED 

the  Dime  Savings-Bank  the  sole  power  to  sell  the  property 
of  Strong  &  Williams ;  it  also  reserves  the  property  to 
Mart  a  e  tnem  as  a  means  of  obtaining  funds  with  which 
contracts  one  to  meet  their  note  when  due  five  years  hence. 
of  sale.  rj^  regujt  is  that  the  Dime  Savings-Bank  has 

confidence  that  their  long-time  note  will  be  paid.  They 
can  pass  a  conservative  judgment  as  to  its  value,  and  hav- 
ing the  payments  of  principal  and  interest  secured,  the  bank 
offers  to  Strong  &  AVilliams  $1,000  for  their  contracts,  to 
deliver  $1,000  five  years  hence,  together  with  current  in- 
terest payments  of  $45  annually. 

Sometimes  a  memorandum  of  credit  is  included  in  the 
mortgage  itself  instead  of  being  in  a  separate  instrument,  in 
which  case  the  two  obligations  may  not  be  separated.  The 
laws  of  some  States  make  a  difference  in  the  content  of 
such  agreements.  The  laws  of  the  State  of  Washington, 
for  example,  provide  that  when  the  credit  contract  is  not 
Mort  a  e  widened  by  a  separate  instrument,  the  creditor 
without  sepa-  may  not  collect  any  deficiency  remaining  after 
rate  note.  ^Q  gaje  Q.f  ^.jie  prOperty  mortgaged.  Gener- 
ally speaking,  however,  the  funds  derived  from  a  sale  of 
the  mortgaged  premises  are  to  be  applied  to  the  payment  of 
the  "  note "  ;  any  amount  that  remains  unpaid  is  still  a 
charge  against  the  maker  of  the  note. 

When  one  wishing  to  sell  his  note  has  no  property  of  his 
own,  he  may  get  a  friend  to  give  a  mortgage  on  his  property 
Accommoda  as  secur^J-  In  ^n^s  case>  °ne  person  will  execute 
tion  mort-  the  note  and  receive  the  benefit  of  the  funds, 
9a9e-  while  another  will  execute  the  mortgage  con- 

tract of  security.  This  is  the  same  kind  of  accommodation 
as  the  indorsement  of  another  man's  note,  except  that  it  gives 
to  the  creditor  a  lien  security  instead  of  a  personal  one. 

In  Pennsylvania,  Delaware,  and  several  of  the  States 
that  still  follow  old  English  practice,  a  promissory  note  is 
seldom  used  as  evidence  of  the  credit  contract  to  which  a 
mortgage  on  real  estate  is  given  for  security.  To  illustrate : 


SALES   OP  LONG-TIME   PAPER  156d5 

Oil  ittctt  btl  tl)CSC  Presents  That  /,  J.Wilham  White, 
of  (lie  City  of  Philadelphia,  Contractor  (hereinafter  called 

the  Obligor),  am  held  and  firmly  bound  unto  John  Doe  of  the  same 
City,  Merchant 

(hereinafter  called  the  Obligee),  in  the  sum  of  Five  Thousand  Dollars 
lawful  money  of  the  United  States  of  America,  to  be  paid  to  the  said 
Obligee,  his  certain  Attorney,  Executors,  Administrators  or  Assigns: 
to  which  payment  well  and  truly  to  be  made,  1  do  bind  and 

oblige  myself,  my  Heirs,  Executors  and  Administrators,  all  and  singu- 
lar firmly  by  these  Presents.  Sealed  with  wt//Seal,  dated  the  First  day 
of  A[tril  in  the  year  of  our  Lord  one  thousand  nine  hundred  and  three. 
The  Condition  of  this  Obligation  is  such,  That  if  the  above 
boundeii  Obligor,  his  Heirs,  Executors  or  Administrators,  or  any  of 
them,  shall  and  do  well  and  truly  pay,  or  cause  to  be  paid  unto  the 
above-named  Obligee,  his  certain  Attorney,  Executors,  Administrators 
or  Assigns,  the  just  sum  of  Two  Thousand  five  Hundred  Dollars 
lawful  money  as  aforesaid,  within  three  years  from  this  date, 

together  with  interest 

payable  half  yearly  at  the  rate  of  six  per  cent  per  annum, 

without  any 

fraud  or  further  delay;  and  shall  produce  to  the  said  Obligee,  or  his 
Executors,  Administrators  or  Assigns,  on  or  before  the  first  day  of 
September  of  each  and  every  year,  receipts  for  all  taxes  of  the  current 
year  assessed  upon  the  mortgaged  premises  ;  then  the  above  Obligation 
to  be  void,  or  else  to  be  and  remain  in  full  force  and  virtue:  jJJvinnTictJ, 
however,  and  it  is  hereby  expressly  agreed,  that  if  at  any  time  default 
shall  be  made  in  payment  of  interest  as  aforesaid, 
for  the  space  of  thirty  days  after  any  half-yearly  payment  thereof  shall 
fall  due, 

or  in  such  production  to  the  Obligee  or  his  Executors,  Administrators 
or  Assigns,  on  or  before  the  fin*t  day  of  September  of  each  and  every 
year,  of  such  receipts  for  such  taxes  of  the  current  year  upon  the 
premises  mortgaged,  then  and  in  such  case  the  whole  principal  debt 
aforesaid,  shall,  at  the  option  of  the  said 

Obligee,  his  Executors,  Administrators  or  Assigns,  become  due  and 
payable  immediately,  and  payment  of  said  principal  debt, 

and  all  interest  thereon,  may  be  enforced  and  recovered 
at  once,  any  thing  herein  contained  to  the  contrary  notwithstanding. 
SlnTJ  iJvotonJrt  further,  however,  and  it  is  hereby  expressly  agreed,  that 
if  at  any  time  hereafter,  by  reason  of  any  default  in  payment,  either 
of  said  principal  sum  at  maturity,  or  of  said 

interest,  or  in  production  of  said  receipts  for  taxes,  within  the  time 
specified,  a  writ  of  Fieri  Facias  is  properly  issued  upon  the  Judgment 
obtained  upon  this  Obligation,  or  by  virtue  of  the  warrant  of  attorney 
hereto  attached,  or  a  writ  of  Scire  Facias  is  properly  issued  upon  the 
accompanying  Indenture  of  Mortgage,  an  attorney's  commission  for 
collection,  viz.,  five  per  cent,  shall  be  payable,  and  shall  be  recovered 
in  addition  to  all  principal  and  interest  then  due,  besides  costs  of  suit. 

Sealed  and  Delivered  I  D.  S.  LlNDSAY.  J.  WlLLIAM  WHITE.  \  Seal  [• 

in  the  presence  of  us:  j  JON  EDWARDS.  '  -^ —  ' 


1565  HOW  FUNDS  ARE   OBTAINED 

Mr.  J.  William  White  desires  to  obtain  $2,500,  and,  as 
security,  offers  a  mortgage  on  real  estate  estimated  to  be 
worth  $5,000.  Instead  of  executing  a  promissory  note — an 
unconditional  contract  for  the  future  delivery  of  $2,500, 
with  interest,  etc. — he  executes  an  "  indemnity  bond,"  i.  e., 
a  conditional  contract  for  the  payment  of  $5,000,  the  con- 
The  indemni-  dition  °^  wm'ch  as  stated  "  is  such  that  if  the 
ty  bond  and  above  bounden  obligor,  J.  William  White,  his 
mortgage.  heirs,  executors,  administrators,  or  any  of  them 
shall,  and  do,  well  and  truly  pay  or  cause  to  be  paid  .  .  .  the 
sum  of  twenty-five  hundred  dollars,"  etc.  This  personal 
contract  of  guaranty,  together  with  a  mortgage  on  the  real 
estate  mentioned,  will  be  exchanged  for  the  $2,500.  In 
such  a  transaction  there  is  no  writing  which  sets  out  the 
contract  of  credit  in  detail.  Evidence  as  to  the  credit  con- 
tract is  left  to  the  memorandum  contained  in  the  indem- 
nity bond  and  in  the  mortgage.  There  are,  however,  two 
contracts  of  security  for  the  payment  of  the  credit  con- 
tract— (1)  a  personal  contract  of.  security  in  the  form  of  an 
indemnity  bond  and  (2)  a  contract  of  lien  security  in  the 
form  of  a  mortgage.  Under  such  a  practice  in  Pennsyl- 
vania, a  creditor  may  file  the  indemnity  bond  with  a  pro- 
thonotary  and  obtain  a  judgment  entry  before  default  on 
the  credit  obligation,  and  thus  establish  a  lien  on  all  other 
real  property  owned  by  the  maker.  As  a  result  a  "  straw 
bond  "  is  usually  executed  in  real-estate  mortgage  transac- 
tions— that  is,  one  who  knows  the  law  will  usually  get  some 
one  to  make  the  bond  who  has  no  property ;  he  will  also  pass 
a  deed  to  this  "  straw  man,"  and  then  he  will  execute  the 
mortgage.  The  evils  of  the  law  may  thus  be  avoided  by  the 
more  intelligent;  it  operates  as  a  trap,  however,  to  catch 
the  unwary.  There  is  only  one  explanation  for  such  a  lum- 
bering, indirect,  and  unjust  system  of  credit — viz.,  a  slavish 
following  of  inherited  forms  of  law  and  business  practice. 

The  chattel  mortgage  pertains  to  business  and  properties 
where  the  chief  assets  are  personalty.     A  manufacturer 


SALES  OP   LONG-TIME   PAPER  157 

rents  his  building,  mechanical  equipment,  and  power;  he 
procures  another  part  of  his  equipment  by  means  of  capital 
funds,  obtained  on  credit,  and  gives  his  promis- 
8orv  note  ^or  ^ie  amount-  To  secure  the  funds 
needed  he  gives  a  mortgage  on  his  products. 
These  products  are  so  shifting  in  nature  and  unstable  in 
value  that  they  are  not  usually  found  in  the  general  security 
market.  They  are  more  usually  given  to  banks  or  local 
investors  or  to  supply  houses.  They  belong  to  the  short- 
time  or  commercial-paper  class  rather  than  to  long-time 
credit  transactions. 

A  farmer  owns  a  piece  of  unimproved  land.  He  can 
make  it  productive  only  by  building  fences,  houses,  and 
drains,  and  by  procuring  machinery  and  horses 
mortgages.  with  which  to  till  the  soil.  He  goes  to  a  loan 
company  for  the  needed  funds,  offering  a 
mortgage  on  the  land  as  security.  Mortgages  upon  im- 
proved farm  property,  if  properly  graduated  in  amount, 
are  safe  and  profitable  investments.  The  buyer,  however, 
must  exercise  care  and  judgment.  Unimproved  land  is  not 
the  best  character  of  security  even  though  the  funds  are 
used  to  improve  it.  The  margin  of  value  is  usually  a  small 
one  between  actual  cost  of  improvement  and  the  selling 
price  after  the  improvement  has  been  made.  Should  there 
be  collusion  between  the  loaning  agent  and  the  landowner, 
the  money  advanced  may  be  largely  in  excess  of  the  actual 
property  value.  One  of  the  devices  of  these  enterprising 
companies  is  to  offer  their  own  guarantees  as  to  both  prin- 
cipal and  interest  of  all  mortgages  negotiated  by  them. 
The  investor  should  be  sure  of  two  things :  (1)  the  safety 
of  the  principal ;  (2)  regularity  in  the  payment  of  the  in- 
terest. In  some  portions  of  the  United  States  there  is 
great  danger  of  default  from  causes  such  as  drought,  floods, 
hail,  and  violent  winds — causes  that  may  not  be  anticipated 
by  the  farmer  and  over  which  he  has  no  control.  This 
makes  the  income  of  the  farmer  uncertain,  and  often  causes 


v;    -Vj 
• 


-MORKME 


- .    *  sunn.' 

; y^/frf^f//jd(f  Cantorgancrrs  Citu  ^nsuranct  Compang, 


/.t/r. 


^  ,  /        / '-••' '/.//"// /.//./,/  //,-,^;,,,/, 

#x  .  nrasri'./r-s  ,,/.>s,,  ,//,<.,  „,,  „, y      , 
'/'   .irflffr    >/ /4t . .  ///    ,'f ''/.l^r,ru;&, ,,,-,. • 
----    , •/•//  .>/„// /„.*!  /yt/, //,;,,,  ,,„///  ///, 

"/„„     ,/.,/,„///,     /,„„.,/„„//,      ...,/y,.,,      ,*,      /„£,,/,/„     /. 


SALES  OF  LONG-TIME  PAPER  159 

him  to  default  in  his  payments.  It  is  a  judicious  exercise 
of  investment  judgment  not  to  contribute  large  capital  to 
such  an  enterprise  on  credit;  it  encourages  the  farmer  to 
become  encumbered  in  obligations  which  he  can  not  meet, 
and  involves  the  investor  in  trouble,  loss  of  time,  and  loss 
of  capital. 

Among  the  best  kinds  of  mortgage  securities  are  those 
held  against  improved  city  real  estate,  but  of  this  class  well- 
^  t  located  "  business  property  "  is  usually  prefer- 

on"  business  able  to  residence  property.  The  reason  for 
property."  tjmt  jg  tjiat  buginggg  property  is  a  regular  and 
necessary  part  of  business  equipment,  and  credit  promises 
secured  by  liens  on  such  property  become  a  first  claim 
against  "  net  income  "  of  business ;  residence  property,  on 
the  other  hand,  is  not  used  for  the  purpose  of  income ;  the 
rents  which  support  such  investments  must  come  from  the 
"  net  profits  "  of  other  business  after  the  expenses,  interest, 
taxes,  etc.,  have  been  paid.  Fluctuations  in  values  of  resi- 
dence properties  are  usually  greater  than  those  of  well- 
located  business  properties,  and  they  are  not  as  good  secu- 
rity on  this  account.  The  exercise  of  proper  judgment  and 
a  sufficient  margin  of  safety  may  make  either  class  of  secu- 
rities equally  good  ;  failure  to  exercise  such  judgment  may 
make  either  equally  bad. 

Mortgages  on  mines  are  peculiar.  By  utilizing  the 
resource  against  which  the  mortgage  lien  is  given,  and  on 
Mart  a  s  which  the  industrial  manager  must  rely  for  his 
on  mines  and  income — in  fact,  by  pursuing  the  very  object 
timber  lands.  for  ^ch  tne  capital  contribution  is  obtained—- 
the mine  becomes  exhausted  and  the  security  depreciated. 
This  must  be  taken  into  account  in  estimating  the  value  of 
the  security.  Generally  speaking,  provision  should  be  made 
for  a  sinking  fund — i.  e.,  for  annual  reduction  of  the  prin- 
cipal loan.  Another  method  of  protecting  the  mortgagee's 
interest  is  to  make  the  whole  principal  due  within  such  a 
time  as  to  prevent  exhaustion  of  the  property.  It  is  never 


SALES  OP  LONG-TIME  PAPER  161 

safe  to  allow  loans  of  this  kind  to  run  twenty  or  fifty  years, 
as  is  common  in  some  classes  of  mortgages. 

Mortgage-notes  are  usually  in  large  amounts — they  com- 
monly cover  the  whole  sum  borrowed,  unless  there  is  some 
Parti-  advantage  in  having  the  principal  sum  paid  at 

mortgage  different  dates.  This  may  make  them  difficult 
receipt.  Qf  transfer,  for  the  reason  that  the  investor  may 

not  have  the  amount  of  the  note  available ;  if  available,  then 
he  may  not  wish  all  of  his  available  funds  in  one  property 
or  credit  instrument.  As  a  means  of  finding  a  more  ready 
market  for  mortgages,  financial  houses  have  devised  what 
is  known  as  a  "  parti -mortgage  receipt."  This  is  a  certifi- 
cate of  the  company  holding  the  mortgage  that  the  holder 
has  purchased  a  pro-rata  interest  in  the  mortgage.  Let  us 
suppose  that  a  note  is  given  for  $100,000,  due  in  ten  years, 
secured  by  mortgage.  For  convenience  of  sale,  20  certifi- 
cates of  $5,000  each  will  be  issued  and  sold  by  the  com- 
pany taking  or  holding  the  original  security.  These  cer- 
tificates of  interest  in  the  original  mortgage-note  are  sold, 
and  thereafter  the  company  holding  the  mortgage  becomes 
trustee  for  the  holders  of  certificates  (see  page  158). 

In  further  application  of  this  principle  the  collateral 
certificate  has  come  into  use.  This  is  a  certificate  of  in- 
77  Hat  terest  in  a  number  of  securities  held  in  trust. 
eral  certifi-  A  collateral  trust  is  formed — i.  e.,  certain  col- 
lateral securities  are  placed  in  the  hands  of  a 
trustee.  Against  this,  collateral  certificates  are  issued  and 
sold  in  denominations  to  suit  the  demands  of  the  market. 
Both  of  the  above  forms  of  financial  instrument  bear  a 
close  resemblance  to  bonds ;  in  fact,  they  may  be  said  to 
be  a  "cross"  between  a  bond  and  a  mortgage  security. 
The  form  used  by  Rufus  Coffin  &  Co.  is  exhibited  on  the 
opposite  page.  A  copy  of  a  $25,000  collateral  trust  certifi- 
cate issued  by  the  trustees  of  the  American  Asphalt  Com- 
pany (see  page  162)  is  of  special  interest  in  this  relation, 
on  account  of  the  recent  failure  of  that  company. 
12 


162  HOW  FUNDS  ARE  OBTAINED 


BONDS 

Bonds,  as  credit  contracts,  are  not  to  be  confused  in 
thought  with  bonds  as  contracts  of  indemnity.  Bonds,  as  in- 
struments of  credit,  where  negotiable,  may  differ  from  prom- 
issory notes  only  in  this,  that  they  are  issued  in  series.  For 
example :  Mr.  Russell  Sage  may  wish  to  build  a  large  office 
building  in  New  York.  Let  us  say  that  he  owns  a  lot  at 
the  corner  o'f  Broadway  and  Fourth  Street,  which  is  valued 
at  $500,000.  The  office  building  that  he  has  planned  for 


Certificate  of  Deposit  for  Collateral  Gold  Certificates 


The  COUUERC1AL  TRUST  COUPAI1Y  hertSy  certifies  that  It  hat  rexleed 

Certificates.  aggregating  $  3.&eoo^^—r—.  which  Certificates  were  deposited  tn  trustubject  to 
t  of  the  atone  described  agreement,  anil  subject  to  the  crier  of  the  Committee  therein  named. 
or  a  majority  of  item.  or  their  successors:  and  the  holler  hereof  auenu  and  becomes  a  parti/ 
agreement  by  rexiaing  'kit  Certificate.      The  teller  hereof  it  entitled  to  receive  all  the  securities. 
benefits.  and  advantages  coming  to  the  depositor  of  laid  C.Mfinates  under  said  agreement. 


The  interest  represented  herein  it  transfiraale  ty  delixry  of  this  Certificate,  subject 
and  conditions  of  said  agreement-    This  Certificate  may  be  registered  as  to  ownership,  tut  after  registra- 
tion. no  transfer,  exxpt  on  the  tools*  cf  regis'-ttton.  shall  be  valid,  ualest  thetitrasfer  be  to  bearer. 
when  this  certificate  shall  be  transferable  *y  delieery  as  before. 


erection  on  this  site  is  estimated  to  cost  $1,000,000.  He 
has  $250,000  in  cash,  which  is  available  for  the  purpose. 
How  will  the  remaining  $750,000  be  obtained  ?  Mr.  Sage 
calculates  that  by  borrowing  $750,000,  at  4  per  cent,  the 
income  from  the  rents  will  be  sufficient  to  pay  interest, 
meet  all  expenses  for  repairs,  depreciation,  taxes,  etc.,  give 
to  himself  a  dividend  of  5  per  cent  on  the  value  of  the  lot 
and  $250,000  invested  by  himself,  and  leave  a  surplus  suf- 


SALES  OP  LONG-TIME  PAPER  163 

ficient  to  pay  off  the  $750,000  loan  in  fifty  years.  On  in- 
quiry, however,  he  finds  that  he  can  not  get  $750,000  from 
any  one  person  or  investment  company.  No  one  wishes  to 
risk  so  much  on  the  security  of  a  single  property.  The 
center  of  business  may  change ;  the  properties  adjoining 


$1,000.  No 

I,  Russell  Sage,  an  unmarried  man  'of  the  City  of  New 
York,  State  of  New  York,  for  value  received,  promise  to 
pay  to  the  holder  of  this  bond  the  principal  sum  of  One 
Thousand  Dollars,  gold  coin  of  the  United  States,  of  pres- 
ent weight  and  fineness,  at  the  office  of  the  Union  Trust 
Company  of  New  York,  on  the  first  day  of  January,  1948, 
with  interest  thereon  at  the  rate  of  4$. 

This  bond  is  one  of  a  series  of  first-mortgage  bonds 
issued  by  the  said  Russell  Sage  amounting  in  all  to  the 
sum  of  Seven  Hundred  Fifty  Thousand  Dollars  ($750,000), 
all  of  the  same  date,  for  the  sum  of  One  Thousand  Dol- 
lars each,  and  each  of  which  is  numbered  from  one  (1) 
to  seven  hundred  fifty  (750)  inclusive,  and  all  of  which 
are  secured  without  discrimination  or  preference  by  a 
first  mortgage  duly  executed  by  said  Russell  Sage  on  the 
following  property :  Lots  numbered  forty  (40)  and  forty- 
two  (42)  of  Block  numbered  ninety-six  (96),  of  the  City  of 
New  York,  together  with  the  buildings  and  improvements 
erected  thereon,  or  hereafter  to  be  erected,  the  same  being 
located  on  the  northwest  corner  of  Fourth  Street  and 
Broadway  in  the  City  of  New  York.  RusgELL  SA(JE 


may  come  to  be  used  for  manufacturing  purposes ;  many 
changes  are  possible  within  fifty  years  which  would  cause 
his  property  to  depreciate  in  value  and  impair  the  security 
of  the  loan.  Those  persons  who  make  it  a  business  to  loan 
money  on  business  property  will  not  invest  all  their  funds 
in  one  security ;  they  prefer  to  invest  in  a  variety  of  securi- 


164  HOW  FUNDS  ARE  OBTAINED 

ties  as  a  protection  against  loss.  While  they  are  not  willing 
to  take  the  whole  amount,  they  would  gladly  invest  in  a 
portion  of  the  amount  if  each  part  were  equally  well  se- 
cured. In  order  to  effect  this,  he  decides  to  divide  the 
loan  into  750  parts  of  $1,000  each,  and  give  to  the  Union 
Trust  Company  a  mortgage  on  the  property  as  secur- 
ity for  payment  of  interest  and  principal.  In  other 
words,  he  decides  to  issue  a  series  of  seven  hundred  and 
fifty  first-mortgage  notes  or  bonds,  in  form  the  same  as 
the  bond  or  note  shown  on  page  163,  but  numbered 
serially. 

Having  executed  his  bonds  and  mortgage,  Mr.  Sage 
places  them,  together  with  $250,000  in  cash,  in  the  hands 
of  the  Union  Trust  Company,  under  an  agree- 
company  as  ment  that  they  may  dispose  of  the  bonds  to 
agents  of  purchasers,  and  that  when  the  entire  issue  has 
transfer.  been  disposed  of  (not  until  then)  a  contract  will 
be  made  for  the  erection  of  the  building,  accord- 
ing to  the  plans  and  specifications  previously  adopted,  the 
trust  company  to  have  the  general  supervision  of  the  con- 
struction and  of  payments.  The  Mercantile  Trust  Com- 
pany, as  trustee  of  the  Peter  Cooper  estate,  has  funds  to  be 
invested,  and  after  examining  the  security  for  the  payment 
of  the  bonds  offered  by  Mr.  Sage,  it  decides  to  take  one  of 
them  at  $1,000.  The  Mercantile  Trust  Company  therefore 
makes  a  deposit  with  the  Union  Trust  Company,  for  which 
the  Union  Trust  Company  gives  its  receipt  in  form  similar 
to  that  shown  on  the  opposite  page. 

Such  a  contract  protects  the  purchaser  against  loss  on 
account  of  failure  to  sell  the  entire  issue,  while  the  contract 
of  trust  which  gives  to  the  Union  Trust  Company  the  super- 
intendence of  the  construction  and  the  disbursement  of 
funds,  amply  protects  the  bondholders'  security.  When 
the  entire  issue  has  been  disposed  of,  the  trust  company 
will  deliver  the  bonds  to  respective  purchasers,  and  as  a 
result  of  the  bond  sale  will  have  $750,000.  On  page  166 


SALES  OF  LONG-TIME  PAPER  165 

is  a  copy  of  a  receipt  used  in  the  bond  sale  of  the  Glen 
Echo  Railroad  Company. 


$1,000.  NEW  YORK,  November  17,  1897. 

This  is  to  certify  that  the  Union  Trust  Company  has 
received  from  the  Mercantile  Trust  Company,  trustee  of 
the  Peter  Cooper  estate,  One  Thousand  Dollars  on  deposit 
for  the  purchase  of  one  bond  of  an  issue  of  Seven  Hun- 
dred Fifty,  each  for  the  sum  of  One  Thousand  Dollars, 
executed  by  Russell  Sage  of  New  York,  and  secured  by 
mortgage  on  Lots  40  and  42,  Block  96,  of  the  City  of 
New  York,  together  with  the  buildings  to  be  erected 
thereon,  to  be  known  as  the  Sage  Block,  at  the  northwest 
corner  of  Fourth  Street  and  Broadway,  which  said  bonds 
and  mortgage,  together  with  a  cash  deposit  of  $250,000 
made  by  Russell  Sage,  are  held  in  trust  by  the  Union 
Trust  Company. 

The  condition  of  this  deposit  is,  that  if  all  of  the  said 
issue  shall  be  sold  at  par  on  or  before  January  1,  1898, 
then  the  Union  Trust  Company  will  deliver  to  the  above- 
named  depositor  the  bond  herein  contracted  for ;  but  that 
in  case  the  entire  issue  shall  not  be  so  sold,  then  the  said 
deposit  may  be  withdrawn,  and  in  any  case,  without  fur- 
ther authorization,  it  shall  not  be  applied  to  the  purchase 
herein  described  and  set  forth. 

THE  UNION  TRUST  COMPANY, 

Jacob  Fressenden,  President. 


The  amount  received  from  bond  sales,  added  to  the 
$250,000  cash  deposit  made  by  Mr.  Sage,  provides  the 
$1,000,000  to  be  expended  in  the  erection  of  the 
office  building,  on  the  disbursement  of  which 
the  lot  and  structure  will  stand  as  security  for 
the  payment  of  the  bonds.  Herewith  (page  167)  is  given  a 
copy  of  bond  issued  by  the  Bank  of  the  United  States  after 


166  HOW  FUNDS  ARE  OBTAINED 

it  was  incorporated  under  the  laws  of  the  State  of  Pennsyl- 
vania. This  was  an  unsecured  bond.  It  had  no  mortgage  or 
other  collateral  contract  to  vouchsafe  its  payment.  The  pur- 
chaser relied  entirely  on  the  credit  of  the  bank.  It  stands 
on  the  same  basis  as  an  unsecured  note,  except  that  the 
issue  was  in  even  amounts  of  £1,000  each,  and  ran  fourteen 
years  instead  of  being  made  payable  in  sixty  or  ninety  days. 


The  similarity  in  form  of  bonds  to  promissory  notes,  as 
well  as  the  advantage  of  serial  issue,  is  illustrated  by  the  first 
mortgage  real-estate  bonds  of  the  Philadelphia  Mortgage 
and  Trust  Company  (page  168).  This  company  has  loan 
offices  in  different  parts  of  the  country.  The  bond  here 
shown  is  one  provided  for  its  Birmingham  agent.  One 
wishing  to  obtain  $20,000  on  improved  real  estate  in  Ala- 
bama, will  issue  20  bonds  or  notes  in  series,  each  of  which  is 
a  contract  for  the  payment  of  $1,000.  These  will  be  secured 
by  a  mortgage  executed  to  the  Philadelphia  Mortgage  and 
Trust  Company.  The  Philadelphia  company  will  buy  the 
entire  issue.  It  will  then  hold  the  mortgage,  or  assign  it  in 


SALES  OP  LONG-TIME  PAPER 


16T 


trust  to  some  trust  company  to  be  held  as  security  for  the  pay- 
ment of  all,  and  sell  the  notes  thus  secured  to  customers  in 


such  numbers  or  amounts  as  its  customers  may  desire.  This 
arrangement  allows  the  notes  to  be  placed  on  the  market 
and  disposed  of  to  better  advantage  to  all  parties  than  if 


SALES  OF  LONG-TIME  PAPER  169 

the  contract  for  payment  were  in  one  instrument.  An  ex- 
hibit is  also  shown  on  page  170  of  a  form  of  bond  issued  by 
Mr.  William  E.  Bailey,  of  Seattle,  Washington,  as  a  means  of 
obtaining  a  part  of  the  funds  necessary  for  the  erection  of 
an  office  building  in  that  city  known  as  the  Bailey  Building. 
The  only  way  that  a  bond  is  distinguished  from  an 
ordinary  promissory  note  is  by  the  fact  that  it  is  issued  as 
D  ,  ,.  a  part  of  a  series  of  like  tenor  and  amount, 

nonds  dis-  3 

tingmshed  and,  in  most  cases,  under  a  common  secunty. 
from  notes,  -g^.  ruje  o;£  common  ]aw  the  bond  is  also  more 

formal  in  its  execution.  The  note  is  a  simple  promise  (in 
any  form,  so  long  as  a  definite  promise  for  the  payment  of 
money  appears  upon  its  face),  signed  by  the  party  bound, 
without  any  formality  as  to  witnesses  or  seal.  The  bond, 
on  the  other  hand,  in  its  old  common -law  form,  required  a 
seal,  and  had  to  be  witnessed  in  the  same  manner  as  a  deed 
or  other  formal  conveyance  of  property,  and  though  assign- 
able was  not  negotiable.  This  is  still  the  rule  within  many 
jurisdictions. 

The  contract  of  security  for  the   payment  of  a  bond 
issued  may  be  one  giving  to  the  holders  a  lien  on  property, 

or  it  may  be  entirely  personal.  For  example, 
forTonds  one  maJ  ™*h  to  obtain  $100,000.  To  this  end 

one  may  offer  for  sale  1,000  bonds  for  the  pay- 
ment of  $100  each.  If  the  purchaser  or  purchasers  are  not 
content  to  rely  on  the  unsecured  promise  of  the  maker,  per- 
sonal security  may  be  added — they  may  be  guaranteed,  or, 
when  negotiable,  indorsed.  The  security  for  a  bond  issue, 
like  that  of  a  note,  may  be  found  written  upon  the  face  or 
back  of  the  bond  itself.  On  the  margin  of  the  certificate 
of  indebtedness  (or  bond)  of  the  Ocean  View  Cemetery 
Company  will  be  found  the  written  guarantee  of  the  Metro- 
politan Land  Company,  as  follows : 

FOR  VALUE  RECEIVED  THE  METROPOLITAN  LAND  COMPANY  HEREBY  GUARANTEES  THE  PAYMENTOF 
BOTH  PRINCIPAL  AND  INTEREST  ON  THIS  CERTIFICATE  WHEN  DUE.  NEW  YORK.  SE  PTEMBER  IOT-  1901 
METROPOLITAN   LAND  COMPANY. 


SALES  OF  LONG-TIME  PAPER 


171 


This  is  a  personal  se- 
curity in  the  nature  of  a 
guarantee,  which  is  add- 
ed to  the  credit  contract 
or  bond.  This  particular 
bond  also  has  lien  secu- 
rity in  the  nature  of  a 
trust  deed  and  a  sink- 
ing fund.  The  contract 
made  by  the  Heading 
Terminal  Company,  guar- 
anteeing payment  of 
Reading  Railroad  Com- 
pany bonds  issued  for 
funds  with  which  to  build 
the  depot  at  Philadel- 
phia, is  exhibited  on  this 

page- 
Indorsement  of  a  ne- 
gotiable bond  carries 
with  it  the  same  signifi- 
cance as  indorsement  on 
a  note.  It  may,  how- 
ever, be  qualified  by 
writing  in  any  manner 
agreed  on  by  the  parties. 
The  form  of  indorsement 
found  on  the  back  of  the 
bonds  taken  and  sold  by 
the  Philadelphia  Mort- 
gage and  Trust  Com- 
pany, before  referred  to 
(page  168),  is  reproduced 
on  page  172. 

When  the  company 
wishes  to  assign  a  bond 


172  HOW  FUNDS  ARE  OBTAINED 

without  being  bound  as  an  indorser  or  guarantor,  another 
form  of  indorsement  is  used.  It  may  be  assigned  without 
recourse,  or  may  specifically  limit  its  liability. 

A  mortgage  security  given  for  the  payment  of  a  bond 
issue  is  usually  executed  to  a  trustee — some  disinterested 
Trustee  of  PartJ  wno  holds  the  security  for  the  benefit  of 
bond  seen-  all  concerned.  This  becomes  necessary  from 
the  fact  that  the  bonds  are  held  by  a  number 
of  persons  ;  all  of  them  are  interested  in  a  common  se- 
curity. If  one  of  the  bondholders  were  to  hold  the  mort- 


J//////H '//6  / ,jfrf//rW/''ft/^'/S'//  f '/#"'/'./<  ffttffif&M ''"'  •  tf'/S//f  'J/f/H"f/' ///'' /  // 7 /A ///' / tr/'/t/f 

\jf'r/f ///#/. tf////fy//fy/i"////ss.n/f/w///r ///< .  tff////t/r//i'///</.  f/r/yOM  f///r/,/i/wtf//f/MiHy, 

rft/frH/ty,///*/f/f,j/M//^,r/t'S//rt£.^ 

//»;«,/,:s////r /*///«,*/ ,  r/f/. 


gage  he  might  derive  an  undue  advantage  over  other  hold- 
ers. Such  an  arrangement  would  deprive  a  bond  issue  of 
its  special  advantage.  The  rights  of  all  parties  are  pro- 
tected by  making  some  disinterested  person  trustee  for  the 
purpose  of  holding  and  administering  the  security. 


SALES  OP  LONG-TIME  PAPER  173 

Since  the  trust  company  has  come  to  be  a  prominent 
feature  of  financial  life,  it  is  the  usual  thing  to  have  mort- 
Who  may  be  gaoe  security  of  a  bond  issue  made  to  such  a 
trustee  of  a  company  in  trust.  It  is  from  this  class  of  rela- 
tions that  the  trust  company  derives  a  large 
part  of  its  business.  Any  one  who  is  capable  of  receiving 
title  to  property,  however,  may  become  a  trustee.  It  some- 
times happens  that  one  of  the  bondholders  will  hold  the 
mortgage  for  himself  and  all  others.  This  makes  him 
responsible  as  trustee  to  the  other  bondholders. 

Very  often  stocks,  as  well  as  bonds,  are  called  "  securi- 
ties." On  this  account  it  may  be  well  to  distinguish  between 
How  corpo-  corporate  shares  and  corporate  bonds.  The  cor- 
™ifferUfrom  Porate  share  is  a  certificate  of  proportionate  pro- 
corporate  prietary  interest  in  a  corporation — that  is,  it  is 
received  in  exchange  for  contributions  of  funds 
made  by  a  proprietor.  The  bond,  on  the  other  hand,  is  a 
credit  obligation  of  the  company.  The  stockholder  stands 
in  much  the  same  relation  to  a  corporation  as  does  a  partner 
to  an  unincorporated  company — i.  e.,  he  is  a  joint  owner  of 
the  concern.  The  bondholder,  however,  has  no  interest  in 
the  company ;  he  simply  holds  a  contract  which  binds  the 
corporation  to  pay  him  a  definite  sum  of  money.  The 
bondholder  usually  has  some  kind  of  security  for  the  fulfil- 
ment of  his  contract ;  the  stockholder  has  no  security,  and 
can  have  none,  (1)  because  his  contract  is  not  one  for  the 
payment  of  a  definite  sum  of  money  ;  (2)  because  his  income, 
as  a  proprietor,  can  be  nothing  but  a  share  in  the  divi- 
dends declared  out  of  the  profits  of  the  company  after  the 
payment  of  all  credit  demands. 

DEFINITION  AND  CLASSIFICATION  OF  COKPORATE  BONDS 

With  reference  to  the  nature  of  security,  corporate  bonds 
fall  under  two  classes,  each  of  which  has  several  subdivisions. 
Those  which  are  based  on  personal  security  are  either 


174  HOW  FUNDS  ARE  OBTAINED 

"guaranteed"  bonds  or  "indorsed"  bonds.  These  have 
Guaranteed  ^een  discussed  and  distinguished  at  such  length 
and  indorsed  that  nothing  further  need  be  said  except  to  call 
bonds.  attention  to  the  fact  that  they  form  a  part  of 

the  classification  determined  by  the  nature  of  the  security 
offered. 

The  different  kinds  of  bonds  based  on  lien  security  are 
numerous.  Many  of  these  take  their  names  from  the  charac- 
Bonds  based  ^er  °^  ^e  property  against  which  the  lien  runs. 
on  lien  Among  the  most  commonly  found  upon  the 

security.         market  are  the  following : 

It  may  happen  that  a  corporation  will  have  large  hold- 
ings of  real  estate  which  may  be  separated  from  its  other 

properties.  Many  of  the  railroads  have  received 
Jomfo  a'e  grants  from  the  Government,  and  desiring 

to  use  these  lands  as  a  basis  for  security  instead 
of  selling  them,  a  separate  issue  of  bonds  has  been  made 
upon  the  real  estate  as  security.  They  are  called  real-estate 
bonds,  to  distinguish  them  from  the  other  bonds  issued  by 
the  company  having  a  different  kind  of  lien  security  to 
assure  payment. 

Instead  of  dividing  the  property,  however,  and  issuing 
one  kind  of  bonds  on  the  security  of  one  property,  and  an- 
2  General  other  issue  on  another  property,  an  issue  may  be 
mortgage  made  the  security  for  which  is  a  mortgage  on 

all  of  the  properties  of  the  corporation.  This 
is  commonly  called  a  "general  mortgage"  (page  175). 

If  mortgages  have  already  been  given  on  particular  parts, 
and  subsequently  another  mortgage  is  given  for  the  security 

of  a  new  issue  covering  the  whole  property, 
'mortqaqe  *ne  new  general  mortgage  is  called  a  "  blanket 

mortgage."  That  is,  it  is  a  mortgage  which 
covers  the  properties  held  as  security  for  the  payment  of 
all  previous  issues. 

Several  independent  properties  or  corporations  may  be 
consolidated.  Each  of  these  companies  consolidated  has 


SALES  OP  LONG-TIME  PAPER 


175 


creditors  to  be  paid,  and  the  new  company  has  need  for 
new  funds.     In  order  to  provide  for  the  redemption  of 


176  HOW  FUNDS  ARE  OBTAINED 

bonds  outstanding  against  the  old  companies,  as  well  as  for 
financing  the  needs  of  the  new  one,  the  whole  debt  is  con- 
4  Consoli-  solidated  and  bonds  are  issued  under  a  common 
dated  mart-  security  to  this  end.  A  consolidated  bond, 
ffaffe-  therefore,  is  one  of  an  issue  secured  by  a  gen- 

eral mortgage  on  properties  consolidated,  the  purpose  of 
the  issue  being  that  of  refunding  the  outstanding  obliga- 
tions of  the  several  concerns  combined. 

A  large  system  of  railroads  is  commonly  made  up  by 
consolidating  or  uniting  a  number  of  smaller  companies. 

The  New  York  Central  was  organized  in  1854 
bond™8*  l  as  a  consolidation  of  seven  or  eight  short  local 

lines  running  along  the  Erie  Canal.  The  Penn- 
sylvania system  is  made  up  of  a  large  number  of  smaller 
systems.  The  New  York,  New  Haven  &  Hartford  is  an- 
other example  of  this  kind.  When  these  consolidations  are 
made  there  are  usually  several  bond  issues  already  out- 
standing on  the  several  roads  that  enter  into  and  become  a 
part  of  the  new  consolidated  system.  These  old  roads  be- 
come divisions  of  the  new  system,  and  their  separate  out- 
standing bonds  are  called  "divisional  bonds."  The  term 
applies  to  railroad  bonds  of  this  kind  alone. 

The  bonds   so  far  discussed  have  had  for  security  a 
mortgage  on  some  form  of  real  property.     Very  often  the 

bond  issue  is  based  on  personal  property.  One 
^irmtliondal  °f  the  m°st  common  of  tnis  class  is  tne  co1- 

lateral  trust  bond.  This  is  the  same  as  a  col- 
lateral note,  except  that  the  whole  issue  has  for  security 
other  stocks,  bonds,  or  mortgages  placed  in  the  hands  of  a 
trustee  under  a  contract  which  provides  for  their  sale.  These 
securities  are  placed  in  trust  for  the  payment  of  principal 
and  interest.  They  may  be  sold  and  the  proceeds  applied 
in  case  of  failure  of  the  one  issuing  the  bonds  to  make  pay- 
ment at  the  time  that  interest  or  principal  of  the  issue  be- 
comes due.  These  contracts  of  trust,  or  collateral  security, 
usually  allow  the  maker  to  substitute  securities  of  equal 


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178  HOW  FUNDS  ARE  OBTAINED 

value  in  case  he  wishes  to  use  or  dispose  of  any  part  of 
those  originally  deposited ;  such  substitution,  however,  is 
subject  to  the  discretion  of  the  trustee. 

Another  form  of  bond,  the  security  for  the  payment  of 
which  is  a  mortgage  on  personal  property,  is  what  is  known 

as  an  equipment  bond.  A  company  wishes  to 
Inentbon'cl  purchase  machinery  or  equipment.  It  has  not 

funds  enough  to  pay  for  the  amount  needed. 
The  company  therefore  makes  an  arrangement  with  a  manu- 
facturer of  equipment,  or  some  company  having  machinery 
to  sell,  to  take  bonds,  secured  by  a  mortgage  on  the  ma- 
chines purchased,  in  payment.  This  is  one  of  the  devices 
commonly  employed  in  buying  "rolling-stock"  for  rail- 
roads and  machinery  for  manufacturing  plants.  The  bonds 
run  for  a  comparatively  short  time,  and  usually  bear  a  good 
rate  of  interest. 

One  of  the  most  highly  specialized  forms  of  railroad 
securities  is  what  is  known  as  the  car-trust  bond.     This  is 

quite  different  in  form  from  all  other  classes  of 
1    bond  obligations.     The  car-trust,  as  it  is  called, 

is  a  concern  which  purchases  cars  from  a  manu- 
facturer. It  will  then  sell  them  to  a  railroad  on  the  instal- 
ment plan.  Or,  to  speak  more  strictly,  the  car-trust  will 
lease  the  cars  to  the  railroad  under  an  agreement  which 
provides  that  when  the  railroad  company  has  paid  a  certain 
amount  of  rent  the  railroad  company  shall  become  the  owner 
of  the  cars,  but  until  such  time  the  car-trust  shall  own  them. 
Let  us  suppose  that  the  Ontario  &  Western  Kailroad  should 
arrange  with  the  Central  Car-Trust  for  $100,000  worth  of 
cars.  It  migho  be  provided  that  the  Ontario  &  "Western 
would  pay  $5,000  per  month  as  rent,  and  that  when  it 
should  have  paid  twenty  months'  rent  at  $5,000  per  month 
it  would  own  the  cars.  The  car-trust  bond  is  simply  the 
obligation  given  by  the  car-trust  company,  the  security  for 
which  is  the  cars  rented  to  the  railroad,  the  payment  on  the 
bonds  being  secured  by  payments  of  rent.  The  form  of 


SALES  OF  LONG-TIME  PAPER 


1T9 


car-trust  issued  by  the  American  Transportation  Company 
is  reproduced  here  in  line  engraving : 


'WW/*:  ,*,/„/„„*/;/„  ff^^k^t^rje^ 
/Ja«/^'</s/SstttS*-sltfitrty,y6< 

The  term  debenture  bond  is  the  most  loosely  used  of 
any  of  the  terms  descriptive  or  suggestive  of  financial  in- 
struments.    Debenture  means  debt,  and  might 
9.  Debenture    ,  ...         .     . 

bonds  of          be  applied  logically  to  any  kind  of  a  credit  m- 

finandal  strument.  Its  uses,  however,  have  come  to  be 
quite  strictly  defined  in  certain  financial  rela- 
tions. The  "  debenture  bond  "  of  a  financial  company  is  a 
form  of  collateral  trust  or  credit  obligation,  secured  by 
deposit  of  bonds  and  mortgages  owned  by  the  company. 
These  "debentures"  are  used  to  obtain  funds  for  per- 
manent use  in  the  purchase  of  other  bonds  and  mort- 
gages, which  may  again  be  used  as  a  security  for  a  fur- 
ther "  debenture  "  issue.  A  facsimile  copy  of  such  a  bond 
issue  by  the  Spokane  and  Eastern  Trust  Company  of  Spok- 
ane, Washington,  is  given  on  page  180.  From  a  reading 
of  the  contract  printed  across  the  upper  corners  of  the  in- 
strument referred  to  it  will  appear  that  "  this  bond  is  se- 
cured by  a  deposit  of  first  mortgages  on  real  estate  repre- 
senting an  amount  loaned,  not  exceeding  forty  (40)  per  cent. 


180 


HOW   FUNDS  ARE  OBTAINED 


of  the  appraised  value,  other  first  lien  real-estate  security, 
municipal  bonds  and  warrants,''  etc.     A  schedule  or  list  oi' 


i  in  nil 

tin 


the  documents  deposited  in  trust  for  the  benefit  of  the  bond- 
holders, is  indorsed  on  the  back  of  each  bond.     The  de- 


SALES  OF  LONG-TIME   PAPER  181 

bentures  of  financial  companies  are  regarded  as  first-class 
investments.  They  are  to  be  clearly  distinguished  from 
railroad  debentures. 

Railroad  companies  issue  a  form  of  bond  called  a  "  de- 
benture "  which  is  quite  different  in  character.  These  bonds 
10  Railroad  verJ  oftom  have  no  security  for  the  payment  of 
debenture  interest ;  many  times  the  principal  also  is  unse- 
cured. The  payment  of  interest  is  dependent 
on  the  surplus  net  earnings  of  the  road.  Instead  of  being 
a  first  lien  on  the  properties  and  incomes  of  the  road,  they 
are  a  last  claim,  and  stand  in  a  rank  inferior  to  all  other 
bonds  of  the  company ;  they  are  in  some  respects  inferior 
to  the  unsecured  short-time  credit  obligations  of  the  road ; 
they  lack  the  advantage  of  paper  maturing  at  an  early  date, 
and  have  little  or  no  advantage  from  contracts  of  security. 
An  income  bond  is  one  the  interest  on  which  is  payable 
out  of  the  surplus  net  earnings  of  the  company  issuing  it. 
The  interest  therefore  is  contingent  on  a  re- 
lo'ndsC"  mainder  of  earnings  after  the  payment  of  all 
expenses,  cost  of  maintenance,  taxes,  interest, 
rentals,  and  other  fixed  charges.  If  there  be  nothing  left, 
then  the  company  is  under  no  obligation  to  pay  interest  for 
the  year.  The  interest,  however,  may  be  made  cumulative 
— that  is,  while  there  is  no  obligation  to  pay  interest  if 
there  be  no  funds  with  which  to  do  so,  yet  the  amount  of 
interest  contracted  for  cumulates  as  a  charge  which  stands 
ahead  of  all  dividends  on  the  common  or  preferred  stock. 
The  income  bond  usually  has  the  payment  of  the  principal 
secured  by  a  mortgage,  which,  although  junior  to  other 
mortgages,  gives  to  the  income  bondholder  a  rank  ahead  of 
the  general,  unsecured,  creditor  (see  page  182). 

Other  bonds  take  their  names  from  the  purpose  of  the 
issue,  as,  for  example,  the  Purchase-Money  Bonds  issued  in 
substitution  for  the  indebtedness  of  the  Virginia  Central  Rail- 
road Company  (page  184).  In  1878  the  Chesapeake  &  Ohio 
got  control  of  the  Virginia  Central  and  arranged  a  consolida- 


PUBLISHING  COMPANY. 


SALES  OF  LONG-TIME  PAPER  183 

tion  whereby  the  securities  of  the  contested  road  were  taken 

up  and  replaced  by  the  credit  securities  of  the  larger  corpo- 

.    ration.    To  this  end,  and  as  a  means  of  securing 

fied  accord-    funds  with  which  to  cancel  those  which  could 

not  be  excnanged> tne  issue  was  made.  Exhibit 
is  also  given  (page  186)  of  the  Improvement 
bonds  of  the  Philadelphia  &  Reading.  These  are  issued  for 
the  purpose  of  financing  the  enormous  coal  properties  pur- 
chased in  the  '70s,  and  for  improving  the  equipment  of  the 
road  for  handling  its  increased  business.  The  bond  here 
shown  is  an  old  one;  it  has  been  through  four  receiverships 
and  reorganizations — has  been  subject  to  all  the  financial 
extremities  of  that  great  system  whose  destiny  has  been 
linked  with  the  development  and  manipulations  of  the 
anthracite  coal  regions  of  Pennsylvania. 

Bonds  also  dLffer  in  the  contracts   of  payment.     The 
contract    may   be  for  the   payment  of  gold  coin  of  the 
Gold  bonds      ^n^ed  States,  of  present  weight  and  fineness, 
in  which  case  they  are  called  "gold  bonds." 
They  may  be  made  payable  in  any  form  of  money  that  is 
legal  tender  for  the  payment  of  debts.     These  are  called 
legal-tender   bonds.      With    reference  to  the 
bonds          r    f°rrn  °f  contract  for  the  payment  of  principal 
and  interest,  there  are  two  classes :  (1)  coupon 
bonds  and  (2)  registered  bonds.     A  coupon  bond  is  usually 
made  payable  to  bearer,  and  the  interest  payments  are  rep- 
resented by  separate  interest  notes  attached  to 
tne  Prmcipal  obligation.     When  a  coupon  be- 
guishedfrom  comes  due,  the  holder  of  the  bond  will  "clip" 
bond6™*1        or  cut  °ff  tne  couPon  which  has  matured  and 
present  it  for  payment  in  the  same  manner  as 
other  notes  are  presented.     This  is  usually  done  by  "  de- 
positing "  it  at  the  bank  where  the  holder  does  his  busi- 
ness ;  the  bank  will  receive  it  "  on  account "  and  send  it  to 
the  office  of  the  company  or  to  the  bank  where  the  com- 
pany does  its  business.     The  registered  bond,  on  the  other 


SALES  OF  LONG-TIME  PAPER  185 

hand,  has  no  separate  contract  for  the  payment  of  interest. 
In  order  that  the  company  may  know  to  whom  interest  is 
due,  the  owner  is  required  to  register  the  bond  with  his 
name  and  address  at  the  office  of  the  company  or  at  the 
office  of  an  agreed  financial  agent.  Then  the  payment  will 
be  made  by  a  check,  the  company  remitting  interest  to  the 
registered  holder  when  interest  comes  due. 

Bonds  may  also  have  a  provision  made  for  payment  be- 
fore the  time  of  maturity,  at  the  option  of  the  maker.  For 
example,  a  twenty-year  bond  may  be  made 
bonds™  payable  at  the  end  of  ten  years  if  the  maker 
so  elect ;  or  a  fifty-year  bond  may  be  made 
payable  after  twenty-five  years,  and  on  the  1st  of  January 
each  five  years  thereafter,  if  the  maker  so  elect.  This  pre- 
vents the  creditor  making  demand  before  the  ultimate  time 
of  maturity,  but  gives  to  the  debtor  the  right  to  pay  his 
debt  before  maturity. 

Other  classes  of  bonds  take  their  names  from  the  special 
privileges  granted  to  the  owner  or  holder.  Convertible 
bonds  are  credit  obligations  which  may  be  con- 
le  verted  into  some  other  form  of  liability.  That 
is  to  say,  a  mortgage  bond  may  give  to  the 
holder  the  right  to  convert  his  holding  into  preferred  stock, 
or  a  divisional  bond  may  be  made  convertible  into  a  con- 
solidated mortgage  bond. 

Like  a  promissory  note,  a  bond  may  be  canceled  by 
payment.  Being  a  contract  for  the  future  delivery  of 
Payment  and  monev5  the  contract  is  fulfilled  when  the  money 
extension  of  is  delivered  according  to  the  tenor  of  the 
agreement.  It  sometimes  happens,  however, 
that  the  maker,  or  one  issuing  the  bond,  is  unable  to  fulfil 
its  conditions.  Then  the  only  remedy  is  "  settlement."  A 
settlement  may  be  effected  by  judicial  procedure  or  volun- 
tarily between  the  parties.  By  judicial  procedure,  the  prop- 
erty on  which  the  lien  contract  of  security  is  held  may 
be  sold.  By  voluntary  agreement,  something  other  than 


SALES  OP  LONG-TIME  PAPER  187 

money  payment  may  be  taken,  or  an  "extension"  may 
be  made.  A  contract  of  extension  is  shown  on  page 
188.  This  contract  is  between  the  Reading  Company  (a 
security-holding  concern)  and  the  Philadelphia  &  Reading 
Railroad. 

RECEIVERS'  CERTIFICATES 

In  a  corporation  to  which  so  many  have  made  contri- 
butions of  funds — a  company  whose  proprietors  are  divided 
into  classes  (common  and  preferred),  and  whose  creditors 
have  distinct  rights  and  opposing  interests — controversies 
very  often  arise  which  require  the  interference  of  courts 
to  protect  the  rights  of  parties  concerned.  The  property 
is  usually  in  the  possession  of  the  officers  of  the  company 
as  representatives  of  the  stockholders.  When  controver- 
sies arise,  the  parties  in  possession  control  the  earnings  and 
incomes;  they  therefore  have  a  marked  advantage.  The 
earnings  of  the  Pennsylvania  Railroad,  for  example,  amount 
to  nearly  $100,000,000  per  year.  The  entire  stock  interest 
is  only  $150,000,000.  Let  us  suppose  that  those  in  pos- 
session represent  only  $80,000,000  of  the  stockholdings. 
During  a  year  they  might  divert  enough  current  income 
to  repay  the  entire  amount  of  the  investment,  while  the 
other  stockholders  and  the  creditors  would  be  entirely  de- 
prived of  revenue.  It  often  happens  that  a  controversy 
will  last  several  years.  To  leave  the  property  in  the  hands 
of  any  party  in  interest  might  prove  ruinous  to  all  others. 
As  a  means  of  preventing  injustices  of  this  kind,  the 
court  to  which  the  controversy  is  referred  will  appoint 
an  officer  of  its  own — some  one  responsible  to  the  court 
— to  receive  the  property  of  the  corporation  and  man- 
age it  pending  litigation.  Such  an  officer  is  called  a  re- 
ceiver. 

Litigation  involves  expense.  When  parties  appeal  to  the 
courts  for  adjudication  of  rights  and  claims,  the  costs  be- 
come a  first  charge  on  the  property.  Court  costs  are  always 


SALES  OF  LONG-TIME  PAPER  189 

the  first  claims  paid.  The  expenses  of  receivership  are  in 
the  nature  of  court  costs.  In  the  management  of  a  railroad 
Security  of  tne  receiver  may  be  required  to  obtain  millions 
receivers'  of  dollars  to  pay  for  operation,  maintenance, 
ltes"  supplies,  etc.,  and  to  meet  current  demands.  To 
obtain  these  funds  the  receiver  issues  a  special  kind  of  credit 
obligation  known  as  a  receiver's  certificate.  These  are  very 
often  issued  in  uniform  amounts  and  in  series,  so  that  they 
appear  in  the  form  of  bonds.  But  although  they  have  no 
contracts  of  security  for  payment,  by  virtue  of  their  being 
issued  for  court  costs,  they  are  a  prior  lien  on  all  the  assets 
and  incomes  of  the  company. 

The  financial  advantage  of  the  receiver's  certificate  to 

the  business  concern  for  the  operation  of  which  it  is  used 

is  apparent.     By  its  use  the  receiver  is  enabled 

The  advan-  *  •      »       i        i  f     -, 

tages  of  to  obtain  funds  when  the  officers  of  the  com- 

™ertificates  ^nJ  can  not-  Quite  af*  marked  are  the  ad- 
vantages to  the  purchasers  of  the  certificates. 
By  obtaining  a  first  lien  on  the  property  the  holders  may 
force  all  other  claimants  to  terms,  and  even  drive  a  first- 
mortgage  bondholder  to  settle.  This  brings  the  parties  to 
the  conflict  to  an  adjustment  of  interests,  when  otherwise  a 
settlement  could  not  be  reached  except  by  selling  out  and 
winding  up  the  affairs  of  the  company. 

THE  LEASE — ITS  KELATIONS  TO  FINANCE 

A  lease  is  a  contract  entered  into  which  allows  one  per- 
son, called  the  lessee,  to  use  the  property  owned  by  another, 
called  the  lessor.  Brown  wishes  to  engage  in  the  business 
of  manufacture  of  cotton  cloth.  Jones  has  a  factory  which 
will  suit  Brown's  purpose.  Jones  will  sell  the  factory  for 
$100,000.  Brown  has  not  the  funds  to  purchase  the  fac- 
rory.  His  capital  is  limited  to  $50,000,  and  he  will  need 
this  to  run  the  plant.  Brown  proposes  a  plan  whereby  he 
can  obtain  the  use  of  the  factory,  and  pay  for  its  use  out  of 


190  HOW  FUNDS  ARE  OBTAINED 

earnings.  He  offers  $10,000  per  year  to  Jones  for  the  use 
of  the  plant,  the  amount  to  be  paid  as  follows :  $5,000  in 
six  months  and  $5,000  one  year  hence.  This  Jones  accepts. 
The  use  of  the  lease  is  plain.  It  avoids  the  necessity  of 
raising  funds  with  which  to  purchase  that  part  of  Brown's 
business  equipment.  Instead  of  the  factory  being  a  capi- 
tal asset,  and  the  funds  represented  as  a  liability,  the  rent 
becomes  a  fixed  charge  against  the  net  earnings  from  opera- 
tion. The  value  of  the  lease  is,  that  it  makes  it  possible 
for  Brown  to  obtain  a  business  equipment  without  raising 
additional  funds. 

Credit  transactions  are  carried  on  under  the  guise  of  a 
lease.     The  use  of  the  lease  by  a  railroad  as  security  for 
the  purchase  of  cars  has  been  described  under 

the  title  "  Car-trust  Bonds-"  Tne  8ame  P^- 
ciple  is  employed  in  sales  "  on  the  instalment 
plan."  One  wishes  to  purchase  a  piano.  The  price  is 
$500.  This  may  be  paid  for  at  $10  per  month.  Instead 
of  the  seller  taking  a  note  with  a  mortgage  on  the  piano  as 
security  for  the  payment  of  the  note,  he  leases  the  piano  to 
the  purchaser  for  $10  per  month,  the  agreement  being  that 
when  the  purchaser  has  paid  $500  in  rent  he  shall  become 
the  owner. 

Some  merchants  make  a  special  feature  of  sales  on 
credit  secured  in  this  way.  They  advertise  extensively, 
The  uses  of  asking  people  of  small  means,  laboring  men, 
the  lease  by  etc.,  to  deal  with  them  on  credit.  Instead  of 
'res'  making  a  direct  sale,  however,  they  simply 
lease  the  cook-stove,  the  carpet,  the  wall-hangings,  the 
crockery,  etc.,  and  retain  the  title  to  the  goods ;  they  col- 
lect rents  till  an  agreed  amount  has  been  paid,  when  the 
merchant  gives  the  title  to  the  purchaser.  This  allows  a 
man  without  accumulated  funds  to  set  up  an  establishment, 
and  surround  himself  with  comforts  of  life  which  otherwise 
he  could  not  afford.  He  is  limited  only  by  his  inability  to 
pay  the  rent. 


SALES  OF  LONG-TIME   PAPER  191 

While  the  lease  gives  to  the  merchant  the  best  security 
possible,  it  threatens  the  purchaser  with  loss  of  the  goods 
Dangers  of  an(*  a^  previous  payments  on  them  in  case  of 
lease  pur-  default  of  one  rent  payment.  In  the  case  of 
the  piano  purchase  above  referred  to,  the  pur- 
chaser may  have  paid  $450  in  rents,  at  $10  per  month,  and 
have  still  only  a  $50  balance  before  the  title  would  pass, 
but  failure  to  make  the  next  month's  payment  would  give 
to  the  owner  (the  piano  dealer)  the  right  to  take  the  instru- 
ment away,  and  confiscate  the  whole  amount  paid  in.  This 
is  the  method  commonly  employed  by  company  stores  in 
the  mining  districts.  The  miner  can  get  what  he  will 
within  the  limits  of  the  judgment  of  the  company  store- 
keeper as  to  the  ability  of  the  employee  to  make  payments 
of  rent.  But  the  laborer  stands  in  constant  danger  of 
losing  his  all  by  having  his  wages  gtopped  for  a  month. 


PART   III 

INSTITUTIONS  AND   AGENTS  USED  IN 
FUNDING   OPERATIONS 


14 


CHAPTER  IX 
THE  UNITED  STATES  TREASURY 

THE  Government  stands  in  a  double  relation  to  modern 
systems  of  finance.  In  the  first  place,  it  must  provide  a  uni- 
Reiations  of  f orm  system  of  money ;  in  the  second  place,  it 
Government  mUst  give  attention  to  its  own  financial  needs— 
systenus'of  must  arrange  for  its  own  support.  The  first 
finance.  we  may  call  its  money  function  ;  the  second  its 
fiscal  function.  In  this  study  it  is  its  money  functions  with 
which  we  have  to  deal — its  fiscal  relations  belonging  to  the 
realm  of  public  finance.  With  a  primitive  people,  formal 
acts  of  Government  may  not  be  necessary  to  the  choice  or 
use  of  a  common  commodity  as  money  ;  out  of  expediency 
a  general  practice  may  grow  up ;  commodities  which  in 
their  nature  may  be  used  as  a  common  standard  for  the 
comparison  of  value  (such  as  cattle  or  furs)  may  serve  the 
purpose  of  exchange.  But  those  substances  which  best 
lend  themselves  to  the  more  exact  judgment  necessary  to 
Need  for  broad  and  complex  commercial  relations,  have 
coined  not  the  marks  of  individuality  and  of  quality 

stamped  on  them  by  nature — such  as  are 
common  to  cattle,  or  furs,  or  wheat.  The  trader,  there- 
fore, may  not  so  easily  protect  himself  against  decep- 
tion and  loss.  For  example :  One  of  the  characteristics 
that  makes  gold  so  serviceable  as  money  is  the  high  value 
imputed  to  small  quantities  of  the  metal ;  another  is  the 
exact  uniformity  of  weight  and  quality  that  can  be  given 
to  each  piece.  But  these  divisions  and  refinements  are 

105 


196  FINANCIAL  INSTITUTIONS 

purely  artificial ;  by  nature  they  have  not  uniformity  ;  they 
have  no  individual  completeness  as  have  cattle  or  furs, 
and  a  few  grains  added  to  or  taken  from  a  piece  of  gold 
may  so  materially  affect  its  value  as  to  destroy  the  service- 
ability of  a  coin  as  a  standard  for  judgment.  Some  com- 
mon unit  of  weight  and  fineness  is  essential.  The  par- 
ties to  an  exchange,  being  controlled  by  mo- 

1.  Coinage.         .  .        .  A  i  v   j  .         • 

tives  of  gam,  could  not  be  relied  on  to  give 

character  to  coin  ;  the  Government — the  agency  of  the  peo- 
ple devoted  to  general,  as  opposed  to  private,  welfare — must 
give  the  metal  official  stamp,  which  will  stand  as  a  guarantee 
and  protect  the  people  against  the  wiles  and  arts  of  indi- 
vidual traders. 

Reference  has  already  been  made  to  the  advantages  to 
be  gained  from  the  adoption  of  a  single  standard  or  unit 
for  judgments  of  value  in  exchange.  This  advantage 

would  suggest  the  use  of  a  single  material  for 

2.  Providing  .  .  f 

for  a  complex  money.  But  a  single  material  does  not  serve 
system  of  wej]  aj|  of  ^}ie  uses  of  mOiiev.  The  necessity 
Money.  .  /  . 

for  carrying  about  and  transferring  such  quan- 
tities of  money  material  as  will  be  of  great  value  suggests 
the  use  of  a  "precious"  metal  for  the  larger  transactions. 
Materials  which  would  best  serve  in  this  capacity,  however, 
would  require  such  minute  subdivisions  for  small  transac- 
tions and  "change"  as  to  be  wholly  unpractical.  Thus 
gold  serves  well  the  main  purpose — transfers  of  larger 
value  than  $2.50.  But  the  pieces  representing  smaller 
values  would  easily  be  lost,  and  inconvenient  in  use. 
Silver  does  not  serve  well  for  large  exchanges  because  it 
encumbers  the  trader ;  but  it  is  convenient  and  more  prac- 
tical than  gold  for  transfers  ranging  in  value  from  10  cents 
to  $2.  Below  this,  however,  silver  is  not  a  convenient 
money.  The  subdivisions  necessary  for  smaller  "  change  " 
make  it  impracticable,  and  some  such  metal  as  nickel  has 
superior  advantages  until  the  minimum  of  2  or  3  cents  is 
reached,  when  a  still  "baser"  metal  is  found  to  be  more 


THE  UNITED  STATES  TREASURY  197 

convenient.  Bronze  may  be  subdivided  to  represent  values 
of  fractions  of  a  cent,  but  would  be  too  heavy  for  trans- 
actions of  larger  amount.  There  is  economy,  therefore,  in 
a  variety  of  metals  in  the  money  system. 

The  practical  question  to  the  nation,  and  to  the  com- 
mercial world  at  large,  is,  How  can  the  advantages  of  a 
3  jfainte-  single  standard  (or  a  definite  unit  for  the  judg- 
nanceofa  ment  of  value)  be  preserved,  and  at  the  same 
time  the  unquestionable  economy  of  variety  in 
our  system  of  money  ?  Long  and  bitter  experience  has 
driven  men  to  the  conclusion  that  there  is  only  one  solution, 
viz.,  the  establishment  of  a  unit,  or  standard,  in  a  more 
precious  metal,  and  a  system  of  redemption  of  all  other 
forms  of  money  used,  at  a  fixed  ratio.  The  adoption  of 
such  a  system,  however,,  makes  necessary  a  redemption 
agency,  and  this  can  be  established  and  maintained  only  by 
act  of  Government.  Redemption,  however,  has  the  effect 
of  reducing  all  moneys,  other  than  the  standard,  to  forms 
of  credit.  They  constitute  in  themselves  promises  to  pay  a 
definite  amount  of  standard  money  according  to  the  ratio 
stamped  on  their  faces.  If,  for  example,  silver  dollars  are 
made  redeemable  in  gold  whenever  a  silver  dollar  shall  be 
presented  at  a  redemption  agency,  then  every  time  a  silver 
dollar  is  put  into  circulation  the  Government  has  put  out, 
with  this  silver  dollar,  its  promise  to  pay  to  bearer  $1  in 
gold  on  demand ;  the  possessor  of  the  silver  dollar  holds 
By  redemp-  a  cre(lit  obligation  on  the  Government  for  the 
tionofinfe-  payment  of  $1  in  gold  coin  of  the  United 
ins'  States  stamped  on  silver  instead  of  having  the 
promise  written  on  paper.  As  a  credit  instrument,  the 
advantage  of  having  the  promise  to  pay  stamped  on  the 
silver  coin  instead  of  paper  is  this :  that  it  adds  to  the 
promise  of  the  Government  a  collateral  security  equal  to 
the  value  of  the  silver  used,  and  on  redemption  of  the 
promise  the  Government  has  this  collateral  for  use  again ; 
this  increases  the  assets  of  the  Government  held  as  the 


198  FINANCIAL  INSTITUTIONS 

means  of  meeting  promises  to  pay  gold.  The  gold  price  of 
silver  coin  increases  the  ability  of  the  Government  to  get 
gold  with  which  to  meet  these  promises. 

But  the  use  of  credit  money  does  not  logically  stop  with 
redeemable  coin.  If  a  system  of  money  is  developed 
whereby  coins  become  promises  of  the  Government  to  pay 
gold,  what  is  there  to  prevent  it  from  writing  these  prom- 
ises on  paper  and  passing  that  in  payment?  There  is  no 
reason  at  all,  provided  the  Government  at  all  times  keeps 
in  condition  to  meet  these  promises ;  and  if  it  does  not, 
Bv  redemn-  then  silver  dollars  or  copper  coins  would  depre- 
t ion  of  paper  ciate  as  well.  Government  credit  stands  upon 
no  different  footing  than  private  credit.  The 
value  of  the  promise  depends  on  the  judgment  of  the  indi- 
vidual receiving  it  as  to  the  ability  of  the  Government  to 
fulfil  its  obligations.  In  our  system,  paper  money  is  noth- 
ing more  or  less  than  a  demand  obligation  on  the  Govern- 
ment to  pay  gold  on  call ;  there  must  be  gold  available, 
however,  so  that  no  doubt  will  be  entertained  on  this  score. 
The  only  manner  in  which  Government  credit  differs  from 
private  credit  lies  in  the  different  methods  which  may  be  em- 
ployed by  the  Government  to  obtain  gold  with  which  to  pay, 
and  this  applies  as  well  to  its  redeemable  coin  as  to  its  paper. 

The  machinery  with  which  a  government  must  equip 
itself  to  perform  its  monetary  functions  embraces  three 
The  United  distinct  plants :  (1)  A  mint  for  giving  official 
Slates  stamp  and  guarantee  to  its  coin.  (2)  A  re- 

mry'  demption  agency  for  safe  keeping  of  the  re- 
serve, and  for  the  free  interchange  of  the  several  forms  of 
money  used,  as  the  one  or  the  other  may  be  considered 
more  desirable.  (3)  A  revenue  department  by  means  of 
which  necessary  funds  may  be  procured  to  keep  the  reserve 
intact.  In  our  own  Government  all  three  are  combined 
in  the  Department  of  the  Treasury.  The  Independent 
Treasury  may  be  said  to  be  the  key  to  our  whole  system  of 
finance. 


THE  UNITED  STATES  TREASURY  199 

In  this  respect  our  monetary  system  is  somewhat  unique 
. — enough  so  to  warrant  an  account  of  the  conditions  lead- 
ing to  its  establishment.  Before  the  panic  of  1837  and  the 
financial  depression  which  followed,  the  government  had 
made  various  incorporated  banks  the  depositories  of  its 
moneys,  as  well  as  its  disbursing  agents.  Moreover,  the 
banks  depended  on  these  moneys  for  the  maintenance  of 
their  system  of  credit  money.  The  first  Bank  of  the  United 
States  was  chartered  in  1791,  and  continued  in  operation 
twenty  years.  In  1816  a  second  bank  was  organized  by 
the  Government  of  the  United  States  under  a  twenty -year 
charter.  During  forty  years  of  this  period  (1789-1837), 
therefore,  the  Government  had  a  bank  of  its  own  creation. 
At  three  different  intervals,  covering  in  all  a 
theLid°-  period  of  eight  years,  it  had  to  depend  on  State 
pendent  banks.  The  State  institutions,  however,  were 
so  far  from  the  direct  control  of  the  central 
Government  that  the  currency  and  finances  of  the  country 
were  left  in  a  state  of  uncertainty  which  paralyzed  industry, 
and  seriously  handicapped  private  as  well  as  public  transac- 
tions. The  charter  of  the  second  National  Bank  expired  in 
1836,  the  crisis  of  1837  proved  fatal  to  State  banks,  and  with 
their  failure  the  whole  system  of  public  and  private  finance 
was  involved.  The  Government  lost  through  its  deposito- 
ries $28,101,644.91.  The  losses  of  the  people  through  un- 
certainty of  credit  and  the  fluctuation  of  their  money  stand- 
ard was  many  times  greater  than  that  of  the  Government. 
There  was  a  general  demand  for  a  change.  Van  Buren 
had  just  come  into  office  when  this  financial  calamity  oc- 
curred. In  national  politics  he  and  his  party  represented 
State  and  local  interests  as  opposed  to  central  functions ; 
they  were  adverse  to  the  chartering  of  a  third  Bank  of  the 
United  States.  To  meet  the  public  demand  for  a  sound 
and  stable  currency,  and  at  the  same  time  not  to  antagonize 
State  institutions  and  local  interests,  an  Independent  Treas- 
ury was  proposed.  After  three  years  of  political  contro- 


200  FINANCIAL  INSTITUTIONS 

versy,  Yan  Buren's  measure  became  a  law,  but  so  unpopu- 
lar had  the  Administration  become  by  reason  of  the  finan- 
cial and  industrial  depression  of  the  time,  that  in  1840  the 
opposition  carried  the  country  and  Harrison  and  Tyler  were 
elected.  The  opposition  was  a  fusion  party ;  Harrison  was 
the  representative  of  the  old-time  Whig— a  nationalist  in 
sentiment ;  Tyler  was  the  choice  of  the  "  Nullifiers,"  an  ul- 
tra branch  of  the  States  Eights  party.  These  two  political 
groups — hostile  to  the  Administration — joined  forces  to  de- 
feat the  party  in  power ;  but  when  their  common  enemy 
had  been  overthrown  (being  hostile  in  doctrine  and  inter- 
est) they  fell  to  fighting  each  other.  The  Whigs  favored  a 
central  bank.  Had  Harrison  lived,  the  large  Whig  major- 
ity in  Congress,  under  the  leadership  of  Clay,  without  doubt 
would  have  given  us  a  different  financial  history.  But  a 
month  after  inauguration  the  President  died,  and  Tyler 
came  to  be  our  Chief  Executive.  The  breach  between  the 
two  factions  was  at  first  not  a  wide  one.  On  his  acces- 
sion Tyler  announced  his  intention  to  carry  out  the  policy 
favored  by  Harrison  and  his  party.  President  and  party 
agreed  to  repeal  the  provisions  for  the  Independent  Treas- 
ury and  to  incorporate  a  third  Bank  of  the  United  States. 
But  while  the  measure  creating  the  bank  was  under  confer- 
ence and  discussion,  the  breach  widened,  until  finally  open 
war  was  declared,  and  when  the  bill  had  passed  both  houses 
the  President  vetoed  it.  From  this  time  on  no  quarter  was 
given.  The  "Nullifiers,"  having  the  Administration  in 
their  own  hands,  but  being  opposed  by  Congress,  went 
back  to  the  old  party  whence  they  came.  The  next  presi- 
dential election  resulted  in  favor  of  the  Democrats.  Polk's 
administration  revived  the  Independent  Treasury  scheme  of 
Van  Buren,  and  in  1846  it  became  a  well-established  part 
of  our  financial  system. 

Through  the  agency  of  the  Independent  Treasury  our 
money  system  has  gradually  become  a  highly  refined  system 
of  credit.  The  United  States  Treasury  is  an  institution 


THE  UNITED  STATES  TREASURY  201 

possessed  of  "issue"  powers  far  exceeding  those  of  any 
bank ;  and  the  reserve  required  is  smaller  in  proportion  to 
circulation.  Only  one  successful  bank  ever  ap- 
proached  it  —  the  Bank  of  Amsterdam  —  and 
refined  that  ignominiously  failed  when  the  veil  of 

secrecy  was  drawn  and  its  reserve  was  made 
known.  It  is  necessary  only  to  refer  to  the  re- 
ports of  the  Secretary  of  the  Treasury  to  appreciate  the  full 
force  of  this  fact.  In  the  Treasury  there  is  held  for  redemp- 
tion purposes  a  reserve  of  $150,000,000  in  gold.  Primarily 
a  reserve  of  $100,000,000  was  created  to  give  confidence  in 
the  ability  and  willingness  of  the  Government  to  redeem  its 
outstanding  debt  in  the  form  of  United  States  notes  (green- 
backs) ;  but  by  the  National  Bank  Act,  and  by  the  adop- 
tion of  the  gold  standard,  it  came  to  be  the  redemption 
basis  of  our  whole  monetary  system.  On  this  account  the 
amount  of  the  reserve  was  increased  (in  1900)  to  $150,- 
000,000. 

Summarizing  the  credit  moneys  in  circulation  at  the 
end  of  the  fiscal  year  1901,  which  stood  as  a  charge  against 
the  $150,000,000  gold  reserve,  they  appeared  as  follows : 

1.  United  States  notes  (greenbacks) $346,681,016.00 

2.  National  bank-notes 345,126,521.00 

3.  Silver  coins  in  circulation 146,287,981.00 

4.  Silver  certificates 435,014,000.00 

5.  Treasury  notes  of  1890 47,783,000.00 

6.  Currency  certificates 

7.  Fractional  currency  notes  (shinplasters) 15,252,349.96 

8.  Old  demand  notes , 53,847.50 

9.  One-  and  two-year  notes 58,535.00 

10.  Compound  interest  notes 165,850.00 

11.  Minor  coins  (nickel  and  bronze) 32,936,470.38 

$1,369,359,570.84 

Besides  these  several  forms  of  money  which  are  supported 
by  the  $150,000,000  reserve,  provision  was  made  whereby 
the  gold  coins  and  bullion  may  be  deposited  in  the  Treasury 
and  certificates  issued  in  like  amount.  Of  these  there  were 


202  FINANCIAL  INSTITUTIONS 

outstanding  $281,678,659,  but  this  was  considered  a  special 
deposit  and  not  available  for  the  redemption  of  other 
money  obligations. 

The  transactions  of  the  Treasury  in  maintaining  its  credit 
moneys  at  a  parity  with  gold  are  illustrated  in  the  work  of 
the  redemption  agency  for  this  year. 

Redemptions  and  Exchanges. 

1.  United  States  notes $87,862,110 

2.  National  Bank-notes 60,730,773 

3.  Silver  coins: 

Standard  dollars 39,604,974 

Subsidiary  silver 37,066,500 

4.  Silver  certificates 151,026,473 

5.  Treasury  notes  of  1890 21,298,927 

6.  Currency  certificates 

7.  Fractional  currency  notes 

8.  Old  demand  notes 

9.  One-  and  two-year  notes 

Compound  interest  notes 

10.  Minor  coins  (nickel  and  bronze) 4,140,496 

Total  redeemed  by  exchange $401,730,253 

Redemption  and  destruction 373,852,928 

National  Bank-notes  redeemed  from  the  5 

per  cent  fund 129,100,946 

$904,684,127 

Against  the  account  of  redemption  and  destruction  new 
credit  money  was  issued  to  the  amount  of  $292,532,000. 

In  exchange  for  the  $129,100,946  bank-notes 
Redemptions         ,  ' 

of  credit          redeemed,  the  same  amount  01  new  bank-notes 

money  ^  was  issue(i.  Although  there  were  $401,730,- 
253  paid  out  for  redemption  and  exchange  of 
forms  of  money  other  than  gold  coin  or  gold  certificates, 
standard  metal  was  not  actually  used  to  any  great  extent.  In 
most  cases  exchange  of  one  form  of  credit  money  was  made 
for  other  forms  of  credit  money.  Demands  for  payment 
were  met  in  such  forms  of  money  or  credit  as  best  suited 
the  wishes  of  those  making  them.  The  amount  of  gold 


THE  UNITED  STATES  TREASURY  203 

actually  paid  out  in  the  redemption  of  the  $401,730,253,  on 
account  of  redemption  and  exchange,  was  as  follows : 

1.  United  States  notes $819,415 

2.  National  Bank-notes 191,259 

3.  Silver  coins : 

Standard  dollars 10,213 

Subsidiary  silver 244,782 

4.  Silver  certificates 99,897 

5.  United  States  Treasury  notes  (1890) 562 

6.  Minor  coins 62.092 

$1,428,220 

At  the  same  time  (making  allowance  for  gold  certificates) 
there  were  taken  in  by  way  of  exchange  for  other  forms  of 
money,  $1,419,923  in  gold,  leaving  a  net  balance  of  gold  ac- 
Gold  actually  Dually  paid  out  during  the  year  on  this  account 
used  for  of  only  $8,297.  With  this  net  amount  of  gold 
redemptions,  actuauy  pai<]  out  of  fae  Treasury  during  the 

year,  $694,262,253  of  credit  money  was  again  put  back  into 
circulation,  at  a  par  value  with  gold.  During  that  year, 
therefore,  the  net  gold  drawn  from  the  general  fund  to 
keep  up  the  reserve  was  only  about  ^Vfr  °f  one  Per  cent 
of  the  $150,000,000  held  for  redemption  purposes. 

Not  only  are  all  forms  of  money  made  interchangeable 
by  the  redemption  system,  and  $1,369,359,570.84  of  credit 
,,  .  money  made  to  circulate  at  a  parity  with  gold, 

of  integrity  but  through  the  redemption  agency  our  cur- 
°mone  rency  is  kept  in  good  condition,  old  and  tat- 

tered bills  are  received  and  destroyed,  and  new 
bills  issued  in  their  stead. 

The  mint  may  be  said  to  be  the  coin  factory  of  the  Gov- 
ernment. It  is  here  that  gold  and  silver  bullion  is  received 
The  mint  a  ^or  c°inage>  and  mechanical  processes  are  car- 
money  ried  on  necessary  to  the  reduction  of  metals  to 
factory.  standard  fineness  and  to  the  production  of  legally 
prescribed  coins.  The  mint  service  is  distributed  over  the 
country  in  such  places  as  will  best  meet  the  demand.  In 
this  service  there  are  five  mints  and  seven  assay  offices. 


204 


FINANCIAL  INSTITUTIONS 


The  mints  are  located  at  Philadelphia,  San  Francisco, 
Orleans,  Carson  City  (Nevada),  and  Denver  (Colorado).  The 
assay  offices  are  located  at  New  York,  Boise  City  (Idaho), 
Helena  (Montana),  Charlotte  (North  Carolina),  Dead  wood 
(South  Dakota),  and  Seattle  (Washington).  According  to 
the  report,  only  three  of  the  mints — those  at  Philadelphia, 
San  Francisco,  and  New  Orleans — are  employed  in  coinage, 
the  others  receiving  deposits  of  bullion  in  exchange  for 
coin.  The  principal  assay  office  is  at  New  York.  It  is  to 
be  noted  that  the  coinage  plants  are  located  conveniently 
near  to  the  commercial  centers,  while  the  assay  offices  are 
in  centers  of  metal  production  and  importation.  Minor 
coins  are  made  in  Philadelphia  alone.  In  1899  the  produc- 
tion was  as  follows : 


INSTITUTIONS. 

Gold  coinage. 

Silver  coinage. 

Minor  coinage. 

Philadelphia  
San  Francisco  

$49,919,180 
58,258,000 

$9,918,311.65 
5,604,275.00 

$956,910.14 

New  Orleans 

12,199,000  00 

Total  

$108,177,180 

$27,721,586.65 

$956910  14 

Refined  bars  were  produced  at  all  the  mints  and  assay 
offices,  however,  as  follows : 


INSTITUTIONS. 

Deposits  of  metal. 

REFINED  BARS  MANUFACTURED. 

Gold. 

Silver. 

Philadelphia.  ... 
San  Francisco  .  .  . 
New  Orleans  
Carson  

$84,936,261.38 
61,315,442.48 
13,447,938.39 
306,976.30 
21,180,188.28 
62,336,445.67 
1,564,698.73 
2,077,991.34 
244,737.45 
111,779.35 
319,748.69 
6,550,698.16 

$868,012.48 

$117,478.08 
17,188.28 
3,950.85 
9,342.24 
62,872.07 
8,195,351.06 
25,141.67 
39,061.26 
1,305.77 
951.52 
2,447.11 
111,660.72 

3,870.75 

Denver  

21,114,763.13 
53,170,116.54 
1,280,657.17 
2,036,679.26 
243,431.68 
110,827.83 
317,301.58 
6,395,250.11 

New  York  
Boise  

Helena 

Charlotte  
St.  Louis  
Deadwood  
Seattle  

Total.  . 

$254,392,856.22 

$85,540,910.53 

$8,586,710.63 

THE  UNITED  STATES  TREASURY  205 

A  laboratory  is  maintained  at  the  mint  for  making  tests 
cf  weight  and  fineness.  This  work  is  continuous.  A  spe- 
cial committee  is  appointed  as  a  further  safe- 
mint!  °f  ^  guard.  Coins  are  standard  at  .900 ;  .003  is  the 
limit  of  tolerance.  In  no  case  was  a  newly 
coined  piece  found  to  be  outside  the  limit  in  1899,  while 
only  one  was  discovered  in  1898.  But  few  coins  depart 
more  than  .001  from  the  standard.  These  figures  show 
the  exactness  with  which  the  unit  for  judgment  of  value  is 
preserved  in  the  standard  money  of  the  United  States, 
while  the  redeemable  coins  are  watched  quite  as  closely. 

When  a  reserve  of  gold  is  not  kept,  equal  in  amount  to 
the  credit  money  outstanding,  a  revenue  department  of  the 
Treasury  is  essential.  The  present  reserve  fund 
the  "Revenue  serves  only  to  give  confidence  in  the  ability  of 
Department  the  Government  to  meet  present  demands. 
For  the  time  being,  $150,000,000  of  gold  in 
the  National  Treasury  is  deemed  a  sufficient  guarantee 
that  the  Government  will  be  able  to  meet  its  money  obli- 
gations. But  it  is  quite  as  necessary  to  give  assurance  of 
ultimate  ability  to  meet  all  outside  obligations.  Under  or- 
dinary conditions  a  few  millions  of  dollars  in  gold  will  suf- 
fice to  keep  the  whole  $1,369,000,000  of  credit  money  val- 
ued at  par.  There  are  times,  however,  when  for  business 
reasons,  those  holding  this  credit  money  may  wish  to  have  a 
large  portion  of  it  redeemed  in  gold.  Demands  for  gold 
for  private  use,  demands  for  export,  or  some  shock  to  public 
confidence  in  the  credit  system  may  cause  an  extraordinary 
strain  on  the  Treasury.  The  possibility  of  such  unusual  de- 
mands dictates  that  some  means  of  maintaining  the  reserve 
intact  should  be  provided.  In  1893  the  Government  found 
itself  in  a  position  where  the  reserve  was  not  only  impaired, 
but  its  very  existence  threatened.  The  result  was  the  im- 
pairment of  all  the  credit  relations  of  the  nation.  All  pri- 
vate as  well  as  public  credit  depends  on  confidence  that 
the  Government  will  be  able  to  redeem  its  promises,  and 


206 


FINANCIAL  INSTITUTIONS 


pay  gold  in  exchange  for  credit  money  outstanding.  It  is 
this  that  links  the  monetary  promises  of  the  Government 
to  its  fiscal  transactions— that  makes  necessary  a  revenue 
power  as  part  of  its  credit  money  system. 

The  Report  of  1901  shows  that  on  June  29,  1901,  the 
Government  had  in  hand  $385,642,560.46  of  gold  coin,  and 
$109,205,736.96  worth  of  gold  bullion— $494,- 
m°andseoneihe  848,297.42  in  all.  As  against  this,  the  Gov- 
Treasury  for  eminent  held  a  special  5  per  cent  National 
Bank-note  reserve  fund  of  $13,267,236.27,  a 
special  fund  of  $289,017,689  for  the  redemption  of  gold 
certificates,  and  various  other  special  deposit  and  redemp- 
tion accounts  outstanding  to  the  amour.t  of  $8,545,644.24. 
Add  to  these  amounts  the  $150,000,000  reserved  by  law  for 
the  redemption  of  the  credit  money  of  the  United  States, 
and  we  have  a  total  special  reserve  of  $460,830,569.51 
which  must  be  subtracted  from  the  gold  in  the  Treasury 
to  determine  available  funds.  This  leaves  a  net  balance 
over  and  above  the  redemption  funds  mentioned  of  only 
$34,017,727.91,  which  at  that  time  might  have  been  devoted 
to  the  maintenance  of  the  Government  and  to  meeting  its 
fiscal  obligations. 

The  receipts  for  the  year  from  various  sources  were 
$3,011,031,891;  the  disbursements,  $2,993,795,160.  The 
moneys  received  and  disbursed  were  as  follows : 


KIND  OF  MONEY. 

Received. 

Disbursed. 

Gold  coin 

$178219548 

$166,484,087 

Silver  dollars  
Fractional  silver  

59,898,211 
42  966  427 

49,741,106 
41  225  029 

United  States  notes  
Treasury  notes  

490,060.280 
52  918  520 

506,035,348 
53361  616 

National  bank-notes  
Gold  certificates  

195,676,393 
1,268  944  399 

196.670,339 
1.256  329,229 

Silver  certificates  

717,587  461 

719  497  448 

Minor  coins  .  . 

4  760  652 

4  450  958 

Total  .  .  . 

$3011  031  891 

$2  993  795  160 

THE  UNITED  STATES  TREASURY  207 

From  all  sources,  including  redemptions,  clearing-house 
balance  and  transfers,  and  expense  of  Government,  during 

the  year  1901,  $11,735,461  more  of  gold  was 
revenue  to  received  than  was  disbursed.  As  before  shown, 
meet  gold  the  actual  demand  for  redemption  was  only 

about  £  of  one  per  cent,  while  the  net  demand  for 
gold  for  this  purpose  was  only  about  -^-y  of  one  per  cent. 
Suppose,  however,  that  under  our  system  of  interchange- 
able credit  money  the  net  demand  for  gold  had  risen  to  5 
per  cent — a  very  usual  demand  in  times  of  business  adver- 
sity and  financial  strain  :  this  would  have  made  a  difference 
of  over  $140,000,000  in  the  amount  of  gold  in  the  Treasury. 
Not  only  would  the  surplus  be  wiped  out,  but  two-thirds 
of  the  gold  reserve  also.  To  meet  such  an  emergency  the 
Government  must  rely  on  its  revenue  powers.  Of  these  it 
has  three :  (1)  Taxation,  (2)  sale  of  available  assets,  and  (3) 
sale  of  its  bonds.  .That  it  may  not  always  rely  on  taxation 
is  evident  from  the  nature  of  the  money  in  which  taxes  are 
payable.  For  example,  in  the  year  1901,  $622,606,298  of 
gold  were  received  through  customs  and  customs  deposits. 
Yet,  with  these  receipts,  only  $11,735,461  more  of  gold  was 
received  than  disbursed.  When  the  demand  for  gold  is 

strong  the  gold  receipts  from  customs  and 
\nadeqtta™.  taxes  become  small.  Through  its  taxing  power, 

the  Government  is  unable  to  secure  gold  with 
which  to  protect  its  reserve.  When  the  taxing  power  is 
inadequate,  disbursements  in  payment  of  officers,  etc.,  may 
be  made  in  forms  of  credit  money,  but  this  can  not  do  more 
than  temporarily  protect  the  Treasury.  The  credit  money 
disbursed  soon  finds  its  way  through  the  redemption  agency. 
The  excess  of  credit  money  paid  out  during  times  of  strain 
sets  in  motion  the  "endless  chain"  of  redemptions  that 
draws  away  the  surplus.  A  decrease  in  the  expenses  of 
government  may  somewhat  lessen  the  demand,  but  if  the 
demand  for  gold  through  outstanding  credit  currency  be 
strong,  the  reserve  may  fall  to  a  low  point,  and  in  such  an 


208  FINANCIAL  INSTITUTIONS 

event  neither  present  economy  nor  power  to  obtain  future 
revenue  through  taxation  can  avail  to  maintain  it. 

In  the  Treasury  at  the  time  mentioned  there  were  $453,- 
702,931  silver  dollars,  $10,587,556.93  in  fractional  silver, 
2  Sales  of  and  $49>396>841.98  silver  bullion— $513,687,- 
dssets  of  329.91  of  silver  coin  and  bullion  as  an  asset. 
Government.  jja(j  tnjs  been  sold  for  gold,  and  relief  found 
by  conversion  of  quick  assets,  the  silver  owned  would  have 
produced  something  like  $250,000,000  in  gold  coin,  and 
would  have  reduced  the  credit  liabilities  of  the  Govern- 
ment to  the  same  extent.  But  the  Treasurer  had  no  legal 
power  to  dispose  of  the  silver  in  his  possession.  He  might 
have  turned  to  his  bank  assets,  of  which  at  the  time  he  had 
$100,010,493.95  on  deposit  in  the  National  Banks.  This 
might  have  been  turned  into  cash,  but  it  would  have  given 
no  relief,  for  the  banks  would  then  have  converted  the 
United  States  notes  and  the  other  credit  money  reserves 
held  by  them  into  gold  by  presenting  them  at  the  redemp- 
tion agency.  The  gold  reserves  of  the  Government  would 
have  been  reduced  in  like  amount. 

The  third  revenue  power,  loans,  must  now  be  resorted  to. 
From  this  alone  can  relief  come  when  the  other  powers  fail 
to  meet  monetary  credit  demands.  Without  this  power  our 
whole  credit  currency  system  would  have  failed  in  1893. 
In  time  of  stress,  with  $1,369,000,000  of  credit  money  out- 
standing against  the  $150,000,000  reserve,  the  loan  power 
may  be  as  essential  to  the  maintenance  of  the  United  States 
Treasury  as  is  the  power  to  contract  loans  necessary  to  the 
maintenance  of  the  credit  accounts  of  a  commercial  bank. 

The  service  performed  by  the  United  States  Treasury 
is  at  once  apparent.  Upon  it  depends  the  integrity  of  our 
Service  whole  money  system,  and  out  of  the  integrity 

of  the  of  the  money  system  grows  our  system  of  pri- 

lovernment.  yate  credit  FrQm  the  United  gtates  Treasury 

we  now  turn  to  the  private  institutions  and  agents  used  in 
funding  operations. 


CHAPTER  X 
THE  SAVINGS-BANK 

UNDER  a  system  of  exchange,  based  on  consent  of  par- 
ties, any  kind  of  business  may  be  profitable  to  the  extent, 

Ever  busi      ant*  on^  *°  *^e  extent»  tnat  ^  renders  a  service 
ness  based  on  to  society.     One  who  can  not  offer  to  others 

service  something  which  will  give  them  greater  enioy- 

rendered.  ,fe  ..        J   J 

ment  or  greater  business  advantage  than  can 

be  had  elsewhere  at  the  same  price,  must  either  keep  the 
thing  offered  or  reduce  the  price  until,  in  the  judgment 
of  some  member  of  the  community,  an  advantage  is  to  be 
found  in  exchange.  But  one  can  not  sell  at  a  price  which 
will  yield  him  no  profit  and  remain  long  in  business.  A 
business  man  must  get  a  return  which  will  pay  him  for 
his  effort,  as  well  as  offer  some  advantage  to  others  who 
deal  with  him.  The  formula  of  successful  business  is: 
Price  must  equal  cost,  plus  a  profit.  Again,  one  who 
offers  to  sell  goods  at  a  price  which  will  yield  him  a  profit 
must  compete  with  all  others  in  the  market.  The  fact  that 
there  are  buyers  is  proof  that,  in  the  judgment  of  those 
buying,  a  service  is  rendered  to  them  by  the  one  offer- 
ing goods ;  the  fact  that  the  one  who  offers  goods  at  a 
price  which  brings  customers — i.  e.,  remains  in  a  business 
— is  proof  that  lie  produces  and  sells  at  a  price  which 
yields  a  profit.  In  other  words,  the  business  man  is 
able  to  continue  the  particular  business  in  which  he  is 
engaged  under  these  circumstances  only :  that  he  can  both 
serve  the  community  and  at  the  same  time  serve  himself. 
15  209 


210  FINANCIAL  INSTITUTIONS 

His  profit  can  not  be  greater  than  the  total  service  rendered, 
for  when  he  offers  goods  at  a  price  which  leaves  no  advantage 
to  buyers,  they  will  refuse  to  deal  with  him.  The  amount 
of  his  profit  on  a  particular  sale  will  be  the  difference  be- 
tween the  cost  of  the  thing  sold  and  the  price  obtained — his 
profit  is  the  margin  of  advantage  which  he  is  able  to  retain 
for  himself  through  the  organization,  equipment,  and  man- 
agement of  his  business.  Let  us  take  for  illustration  a 
primitive  agricultural  community,  such  as  may  be  found  in 
many  parts  of  Europe.  In  such  a  community  a  man  with 
a  hoe  is  able  to  obtain  an  income  from  his  occupation  suf- 
ficient to  allow  him  to  eke  out  a  miserable  existence.  This 
is  made  possible  because  the  European  farmer  has  his  busi- 
ness so  organized  that,  at  the  price  paid  (a  life  pittance), 
"  the  man  with  the  hoe  "  is  a  more  profitable  laborer  than 
any  other  at  his  command — the  European  farmer  therefore 
employs  him.  In  the  Mississippi  Valley,  on  the  other 
hand,  the  man  with  the  hoe  is  useless  at  any  price ;  here 
the  business  of  agriculture  is  so  organized  that  a  high-class 
machinist  (a  man  of  high-grade  intelligence)  is  the  more 
profitable.  "  The  man  with  the  hoe  "  leaves  Italy  and  goes 
to  Ohio.  In  doing  so,  however,  he  finds  his  old  occupation 
gone;  he  must  either  change  his  implements  of  toil  or  he 
will  soon  find  himself  in  the  almshouse.  In  parts  of  France 
and  Spain,  in  fact  through  a  large  portion  of  Europe,  the 
machine  laborer  of  the  American  farm  would  be  quite  as 
helpless.  There,  to  find  employment  on  a  farm,  he  must 
forsake  his  old  method  of  labor  and  become  a  man  with  a 
hoe.  To  follow  the  sentiment  of  Mr.  Markham  in  his  re- 
markable poem,  "  the  man  with  the  hoe  "  is  doomed  ;  while 
he  is  tilling  a  garden  spot  (a  few  acres  at  most),  the  West- 
ern farm-hand  is  "  tending  "  30  or  40  acres  of  oat-land  and 
seeding  as  many  acres  of  wheat,  30  to  50  acres  of  corn,  and 
has  in  crop  rotation  40  to  00  acres  of  meadow-land  and 
60  to  80  acres  of  pasture.  He  has  in  productive  use  from 
200  to  300  acres  of  fertile  land.  The  peasant  has  for 


THE  SAVINGS-BANK  211 

his  labor  a  few  tons  of  produce,  all  told.  The  American, 
with  his  horses,  engines,  machines,  and  tools,  is  producing 
from  2,000  to  3,000  bushels  of  corn,  from  1,200  to  1,600 
bushels  of  oats,  from  800  to  1,400  bushels  of  wheat  (i.  e., 
4,000  to  6,000  bushels  of  cereals),  and  from  60  to  80 
tons  of  hay ;  he  also  is  keeping  from  50  to  80  cattle 
and  from  50  to  100  swine.  The  peasant  produces  little 
more  than  enough  for  his  own  keep ;  the  Western  farm- 
laborer  reaps  a  harvest  of  foodstuffs  large  enough  to  feed 
a  whole  regiment  of  laborers  who  are  working  in  other 
fields.  The  American  farmer  has  a  large  surplus  of  food 
to  exchange  for  things  produced  by  others,  while  other 
producers,  being  free  to  devote  their  time  to  their  occupa- 
tions, are  as  liberally  provided  with  a  surplus  of  useful 
products.  In  the  competition  between  Europe  and  Amer- 
ica in  the  markets  of  the  world,  the  equipment  of  the 
Western  farmer  is  so  far  superior  to  the  equipment  of  the 
farmer  of  the  Old  World  that  even  the  small  pittance  must 
be  denied  to  the  peasant- laborer,  while  the  American 
"farm-hand"  may  demand  good  wages  and  still  leave  a 
wide  margin  of  profit  to  his  employer.  An  iron -founder 
builds  up  a  large  and  profitable  business  in  a  community 
where  before  only  a  blacksmith  shop  was  found.  How,  it 
may  be  asked,  is  this  made  possible  ?  There  can  be  but 
one  answer :  the  founder  is  able  to  shape  his  materials  better 
or  more  cheaply  than  his  competitors.  To  do  this  he  must 
so  organize,  equip,  and  manage  his  plant  that  he  can  offer 
better  services  to  the  community  than  did  the  blacksmith. 

Profits  are  made  by  obtaining  funds  with  which  to  equip 
some  business  based  on  service  to  be  rendered.  Some  busi- 
Incrensed  nes8  advantage  is  recognized  ;  some  service  may 
profits  the  De  rendered  for  which  others  will  pay  ;  to  per- 

result  of  ,  A.  .  .  ,  m  •  \- 

increased  form  this  service  a  new  form  of  equipment  is 
capital.  needed.  In  obtaining  funds  for  this  purpose, 

however,  the  one  who  undertakes  it  must  so  organize  his 
service,  furnish  himself  with  such  mechanical  appliances, 


212  FINANCIAL  INSTITUTIONS 

and  direct  his  business  in  a  manner  to  put  him  on  a  footing 
superior  to  competitors.  There  must  be  a  better  adaptation 
of  means  to  end.  The  means  at  hand  are  not  entirely 
material  and  mechanical.  He  needs  the  assistance  and  skill 
of  his  fellows ;  his  scheme  of  success  must  be  one  which 
will  allow  him  to  call  in  the  services  of  others ;  for  this  he 
needs  funds.  Even  the  things  necessary  to  his  mechanical 
equipment  can  not  be  obtained  to  advantage  except  by  ex- 
change with  those  whose  business  it  is  to  furnish  them ; 
this  requires  funds.  In  other  words,  one  must  have  capital 
to  work  to  advantage,  or  to  do  business  at  a  profit.  The 
larger  the  capital  the  more  highly  developed  the  industrial 
organization,  the  greater  are  the  opportunities  made  possible 
to  him  possessed  of  the  intelligence  to  avail  himself  of  them. 
In  recognition  of  this  advantage  men  direct  their  ener- 
gies toward  obtaining  more  capital.  It  has  been  before  ob- 
served that  the  only  wav  that  a  laboring  man 
Saving  as  a  -.  P  .  .  .  .  ,  *.  ,  , 

means  of  has  ot  obtaining  capital  is  by  a  process  known 
obtaining  as  saving.  For  the  purpose  of  his  own  income 
capital.  Ai  i  i  •  •  ,  •  TT  • 

the  laboring  man  is  a  business  concern.     He  is 

governed  by  the  same  rules  of  success  or  failure  as  a  busi- 
ness corporation.  Let  us  take,  for  example,  the  New  Eng- 
land Telephone  and  Telegraph  Company.  It  has  equipped 
itself  for  serving  those  who  have  messages  to  be  sent  from 
place  to  place.  In  order  to  do  this  more  effectively,  it  has 
provided  itself  with  wires,  poles,  buildings,  instruments,  etc. 
The  earnings  of  the  company  received  during  the  year  1899 
for  services  performed  were  as  follows : 

Exchange  service  (telephone) $2,934,075.59 

Toll  service 818,459.73 

Private  line  service 68,225.36 

Messenger  service 51,778.14 

For  rents  (real  estate) 1,802.92 

Interest  on  stocks  and  bonds  of  other  companies 

owned 50,402.50 

Miscellaneous 21,610.39 

Gross  earnings  for  year $3,946,354.63 


THE  SAVINGS-BANK  213 

The  expenses  incurred  in  performing  this  service  were 

as  follows : 

General  expense,  including  taxes $640,107.95 

Operating  expense 652,075.64 

Maintaining  the  plant 1,384,258.82 

Rentals  and  royalties 220,724.28 

Private  line  expense 12,399.54 

Messenger  expense 50,693.51 

Real  estate  expense 1,028.90 

Total  expense  of  year .$2.961,289.34 

Net  earnings  for  year 985,065.29 

.  The  carpenter  finds  it  necessary  to  equip  him- 

self with  the  tools  of  his  trade.  His  earnings 
for  the  year  are  : 

Work  on  Jacob  Reiss's  barn $184.00 

Work  on  the  Emerson  house 265.00 

Shingling  Patterson  store 67.00 

Repairs  on  First  Nat'l  Bank  bldg 138.50 

Shop  work  during  year 214.25 

Total  earnings  for  year $868.75 

As  a  means  of  carrying  on  this  service,  however,  the 
carpenter  must  pay  out  a  certain  amount  in  expenses.     He 

has  clothes  to  buy  to  protect  himself  from 
Expenses.  .  .  ,  ,  ,  /  ,  ,  .  ,» 

wind  and  weather  and  to  make  himself  pre- 
sentable in  society  ;  he  has  a  poll-tax  to  pay  ;  he  needs 
shelter,  etc.  His  working  plant  must  be  maintained — i.  e., 
he  must  provide  himself  with  food  and  repair  tools  broken 
or  worn  out.  At  the  end  of  the  year  his  expense  account 
closes  with  the  following  summary  : 

Clothing $89.00 

Taxes 2.00 

Board 268.00 

Repairs  of  tools,  etc 27.75 

Room  rent 96.00 

Shop  rent 100.00 

Incidentals 53.00 

$635.75 
Net  earnings  for  the  year 233.00 


214 


FINANCIAL  INSTITUTIONS 


Profits. 


The  net  result  of  service  in  the  New  England  Telephone 
and  Telegraph  Company  was  $985,065.29.  But  this  com- 
pany had  an  equipment  that  represented  a  capi- 
tal of  $19,000,000.  The  carpenter's  net  earn- 
ings were  $233 ;  his  equipment  cost  him  only  $500.  Dur- 
ing the  year  an  outhouse  burned,  where  he  was  working, 
and  he  had  a  set  of  planes  and  some  other  tools  destroyed. 
It  will  cost  him  $50  to  replace  the  loss.  This  must  be 
made  good  to  place  him  in  the  same  position  he  was  in 
at  the  beginning  of  the  year.  The  $233 — the  net  result 
of  his  services  —are  not,  therefore,  clear  profit.  His  profit 
and  loss  account  will  appear  as  follows: 


PROFIT   AND    LOSS. 

$50  00 

Net  profit  for  year.  .  . 

...     is:}.  00 
$233.00 

The  question  now  arises,  What  will  he  do  with  the 
$183  profits  on  the  year's  business?  One  of  his  expenses 
incurred  was  $100  for  the  rent  of  shop.  He  had  paid  out 
this  amount  for  the  use  of  a  building  as  a  means  of  provid- 
ing better  equipment  than  he  could  have  furnished  with  his 
own  capital.  He  also  recognizes  that  he  could 
fronfSbor  work  to  higher  advantage  if  he  had  a  steam- 
engine  and  some  lathes.  None  of  these  things 
will  be  of  use,  however,  till  he  can  get  all  of  them  together. 
He  decides  to  lay  by  the  $183  and  add  to  the  amount  the 
profit  of  each  year  till  he  has  $1,000— the  sum  that  it  will 
cost  to  buy  his  machines.  It  is  this  process  of  laying  by 
the  surplus  earnings  or  net  profits  for  capital  use  that  is 
called  saving. 

The  service  rendered  by  the  savings-bank  finds  illustra- 


THE  SAVINGS-BANK  215 

tion  in  a  story  told  of  a  journeyman  blacksmith.  He  was 
a  man  of  more  than  ordinary  ability,  but  addicted  to  drink. 
His  employer,  becoming  interested  in  the  man,  thought 
that  he  might  induce  him  to  reform  his  habits.  He 
pointed  out  to  the  journeyman  that  he  was  a  man  of  tal- 
ent ;  that  he  could  get  regular  employment  and  good  wages ; 
that  he  was  spending  his  income  in  a  way  that  would  add 
nothing  to  his  comfort ;  not  only  was  he  not  improving 
his  mental  condition,  but  he  was  contracting  a  habit  which 
would  finally  render  him  morally  irresponsible  and  physic- 
ally unsound.  Continued  indulgence  of  appetite  would  so 
far  unfit  him  for  service  that  no  one  would  care  to  employ 
him  in  his  present  capacity.  He  would  ultimately  be  re- 
duced to  the  ranks  of  the  incompetent  and  end  his  days  in 
poverty.  All  this  the  dissipated  journeyman  admitted 
frankly.  "  But,"  said  he,  "  what  is  there  for  me  to  li ve  for 
and  work  for  except  the  present  ?  What  encouragement 
have  I  to  try  to  get  on  in  the  world  ?  At  one  time  I  enter- 
tained some  hope  for  better  things,  but  this  hope  is  gone." 
He  recounted  that  after  learning  his  trade  he  had  started 
out  with  the  best  of  resolves.  When  young  and  strong  he 
had  determined  to  devote  himself  industriously  to  his  trade, 
to  work  as  a  journeyman  until  he  had  laid  up  enough  to 
buy  a  shop  of  his  own.  He  hoped  ultimately  to  become 
an  employer  of  men,  to  profit  from  the  skill  and  labor  of 
others,  instead  of  having  to  sell  his  own  labor  to  those  who 
had  fie  capital  with  which  to  make  the  most  of  it.  By  in- 
dustry and  thrift  he  had  the  first  year  saved  $200.  This  he 
The  service  deposited  in  a  commercial  bank.  The  second 
ofthcsav-  year  added  0250  more  to  his  account.  A  few 
mgs-bank.  months  later,  however,  after  he  had  saved  some- 
thing over  $500,  the  bank  failed,  and  an  insolvency  proceed- 
ing of  two  yearc  left  him  about  $100  in  dividends  from  the 
bankrupt  estate.  He  resolved  to  trust  banks  no  further. 
The  only  service  which  they  could  render  him  was  to  pro- 
vide a  place  for  the  safe-keeping  of  his  savings.  They  had 


216  FINANCIAL  INSTITUTIONS 

failed  in  this.  The  banks  had  everything  to  gain  from 
his  patronage ;  he  had  everything  to  lose  from  failure.  He 
now  purchased  a  wallet  and  in  this  decided  to  carry  his  sav- 
ings until  he  had  accumulated  the  requisite  amount.  Coin 
was  heavy ;  he  exchanged  all  money  of  this  kind  received 
for  paper  money,  and  small  bills  were  traded  for  large  ones ; 
these  he  could  easily  tuck  away  in  his  wallet.  The  wallet 
he  kept  with  him  while  at  his  work,  and  for  safety  guarded 
his  sleeping-room  with  a  strong  bolt.  He  finally  got  to- 
gether about  $600.  Again  he  thought  the  time  at  hand 
when  he  might  become  the  proprietor  of  a  shop.  One  night, 
while  asleep,  a  tire  broke  out  in  the  house  where  he  lived ; 
the  smoke  thickened  around  him  ;  he  became  stupefied. 
Neighbors  coming  to  the  rescue  forced  the  bolts  and  carried 
him  out  in  time  to  save  his  life,  but  his  wallet  was  left  be- 
hind. Nearly  six  years  of  industry  and  sacrifice  had  come 
to  naught.  In  despair,  he  determined  to  enjoy  his  earnings 
as  fast  as  he  received  them. 

Here  was  a  man  of  skill ;  a  man  of  industrious  habits; 
a  man  who  needed  only  the  encouragement  of  protection  to 
rise  to  a  high  plane  of  industrial  efficiency.  But  the  condi- 
tions were  unfavorable  to  his  rise.  During  the  last  part  of 
the  eighteenth  century  and  the  first  part  of  the  nineteenth 
the  laborer's  lot  was  a  hard  one.  In  Europe,  wages  were 

still  low,  and  a  quarter  of  a  century  of  almost 

Condi  f  ions  ..  /•  /,->  <•    -\r        i        \ 

diving  rise       continuous    warfare   (the   wars    of    JNapoleon) 

'to  the  made  foodstuffs  high.     There  was  small  oppor- 

tunity ',  •:  the  man  who  had  no  means  of  using 
his  own  labor  and  no  means  of  support  other  than  the  sale 
of  his  skill.  England,  the  most  prosperous  among  nations, 
was  overrun  with  paupers.  American  conditions  were  some- 
what more  favorable  to  the  laborer,  on  account  of  the  oppor- 
tunity offered  to  get  out  on  new  lands  and  to  possess  himself 
of  resources  from  which  he  might  earn  a  living,  regardless  of 
employment  and  employers ;  but  even  here  there  was  little 
care  for  the  wage-earner  as  such,  the  man  without  capital. 


THE  SAVINGS-BANK  217 

The  first  savings-banks  were  started  as  benevolent  insti- 
tutions, purely  and  simply.  Prof.  Albert  S.  Bolles  sum- 
marizes the  history  of  their  rise  in  the  following  admirable 
manner :  "  When  a  great  want  is  felt  in  the  world  men  begin 
to  try  to  solve  the  problem  of  how  to  satisfy  the  want.  This 
question  of  dealing  with  simple  men  and  women,  of  taking 
care  of  the  humble  who  had  no  assets,  or  taking  care  of  the 
poor  who  come  to  want  by  improvidence  or  by  misfortune, 
appears  to  have  received  the  studious  notice  of  the  econ- 
The  first  oniist  and  the  philanthropist  at  the  same  time. 
savings-  When  Jeremy  Bentham  and  Malthus  enforced 
the  benefits  of  saving  in  the  interest  of  the 
great  body  of  the  people,  as  well  as  those  who  saved,  about 
the  opening  of  the  century,  an  English  clergyman  and  a 
Scotch  minister,  each  in  his  own  parish,  set  in  operation  a 
plan  for  his  parishioners  to  save  money  which  embodied  in 
substance  the  fundamental  principle  of  the  savings  institu- 
tion. Contemporaneously,  a  woman,  Mrs.  Priscilla  Wake- 
field,  established  such  an  organization  in  England.  Similar 
ideas  were  also  advanced  at  the  same  time  by  a  London 
magistrate,  Patrick  Colquhoun,  who  wrote  upon  the  ques- 
tion of  popular  indigence  and  measures  for  its  relief  as 
early  as  1806.  In  America,  in  1816  and  1817,  the  needs 
and  the  claims  of  the  poor  awakened  attention  at  Boston 
and  New  York,  and  thought  was  immediately  directed  to- 
ward a  savings  institution,  because  it  was  deemed  most  help- 
ful. In  Boston,  in  1816,  it  was  proposed  '  to  form  an  insti- 
tution for  the  security  and  improvement  of  the  savings  of 
persons  in  humble  life  until  required  by  their  wants  and 
desires.'  The  first  savings-bank  in  the  State  of  New  York 
was  the  direct  result  of  a  meeting  of  citizens  at  the  New 
York  Hospital  on  December  16,  1817,  to  take  into  consid- 
eration the  subject  of  pauperism.  A  committee  was  ap- 
pointed to  report  on  the  prevailing  cause  of  poverty.  The 
report  recites,  among  other  causes,  that '  prodigality  is  com- 
parative among  the  poor ;  it  prevails  to  a  great  extent  from 


218  FINANCIAL  INSTITUTIONS 

inattention  to  those  small  but  frequent  savings  when  labor 
is  plentiful,  which  may  go  to  meet  privation  in  unfavorable 
seasons.  When  the  constitution  of  this  society  was  drafted, 
it  declared  that  one  prime  purpose  of  the  organization 
should  be  'to  hold  out  inducements  to  those  people  to 
economy  and  savings  from  the  fruits  of  their  own  industry 
in  seasons  of  great  abundance.'  The  earnestness  of  the 
men  who  were  members  of  this  organization  is  proved  in 
the  passage  of  the  act  upon  their  petition,  by  the  Legisla- 
ture in  1819,  for  the  incorporation  of  a  bank  for  savings. 
In  each  of  the  two  years  thereafter  a  savings-bank  was  in- 
corporated in  that  State.  The  Philadelphia  Savings-Bank 
was  incorporated  in  February,  1819." 

The  service  to  be  rendered  by  the  savings-bank  is  quite 
a  different  one  from  that  rendered  by  the  commercial  bank. 
With  the  wage-earner  the  principal  financial  service  to  be 
rendered  is  not  one  of  providing  current  funds  to  him  who 
The  safe  already  has  capital ;  it  is  one  of  providing  a 
investment  of  safe  investment  for  the  small  savings,  or  sur- 
plus net  earnings,  of  the  wage-earner  in  the 
form  of  an  interest-bearing  credit  account  of  men  without 
capital,  men  who  are  toiling  for  others  in  order  that  they 
may  accumulate  capital  funds.  The  first  prerequisite  of  a 
savings  account  is  safety  ;  the  second  is  a  return  of  income 
on  the  investment  compatible  with  safety.  A  man  with  a 
shilling  or  a  pound,  a  dollar  or  even  twenty  dollars,  can 
seldom  find  opportunity  to  invest  such  a  sum  to  advantage. 
But  when  the  shillings  and  pounds  and  dollars  eaved  by  the 
The  invest-  m&ny  are  exchanged  for  interest-bearing  ac- 
mentof  sav-  counts,  the  fund  brought  together  in  the  bank 
each  week  or  month  will  be  large  enough  to 
enable  its  officers  to  invest  them  safely  at  a  still  higher  rate. 
This  furnishes  a  source  of  income,  and  immediately  con- 
verts the  small  savings  of  the  laborer  into  an  investment 
capital.  The  laborer  need  not  wait  until  he  gets  a  large 
fund  together  before  he  can  use  it.  Moreover,  he  does  not 


THE  SAVINGS-BANK  219 

feel  that  his  saving  is  a  sacrifice,  but  that  he  is  rendering  to 
himself  a  service  and  providing  himself  with  the  means  to 
higher  enjoyment.  With  safety  and  earning  power  com- 
bined, the  inducement  to  saving  is  vastly  increased — the 
industrial  community  becomes  more  highly  capitalized, 
more  efficient,  more  highly  cooperative,  and  farther  re- 
moved from  want.  The  motive  to  extraordinary  efforts 
and  saving  is  shifted  from  that  of  self-sacrifice  to  one  of 
higher  enjoyment.  The  laborer  is  encouraged  to  strive  to 
acquire  a  working  capital  which  will  give  him  either  high- 
er industrial  efficiency  or  an  investment  fund,  the  income 
from  which  will  yield  a  larger  competence. 

The  service  which  it  is  possible  for  such  an  institu- 
tion to  render  in  an  ordinary  community  may  be  illus- 
trated from  the  industrial  organization  of  a  typical  town. 
In  the  place  referred  to  is  a  flouring  mill,  a  foundry  and 
machine  shop,  two  implement  factories,  a  brewery,  and 
a  wagon  factory.  These  establishments  employ  about  500 
men ;  besides  these,  there  are  railway  shops  which  give  em- 
ployment to  some  250  more.  Some  of  these  receive  large 
salaries,  others  are  common  laborers.  The  750  employees 
receive,  on  the  average,  about  $2  per  day.  Altogether 
they  earn  about  $1,500  daily— over  $35,000  per  month. 
Out  of  this  income  they  have  to  pay  living  expenses.  With 
each,  however,  there  is  a  possibility  of  saving  something. 
Some  of  the  better  paid  ones  may  save  as  much  as  $25  per 
month ;  others  may  not  lay  by  more  than  $2  or  $3  per 

month.     Let  us  suppose  that  on  the  average  $5 
Illustration  .  „,.  .  6. 

of  the  service  Per  month  might  be  saved.  Ihis  would  give  a 
of  a  savings-  grOss  saving  fund  of  $3,750  per  month  for  de- 
posit in  savings  accounts.  But  there  are  also 
between  500  and  GOO  domestic  servants  in  the  town  that 
earn  on  the  average  $3  per  week — about  $6,500  per  month, 
besides  board  and  lodging.  Let  us  say  that  $2,500  of  this 
amount  could  be  made  available  for  investment.  This 
would  increase  the  monthly  income  of  a  bank  to  $5,000, 


220  FINANCIAL  INSTITUTIONS 

While  $1  or  $5  could  not  be  conveniently  kept  or  otherwise 
judiciously  invested  by  the  laborer,  the  bank,  with  $5,000 
in  hand  at  the  end  of  each  thirty  days,  could  do  either. 
Sixty  thousand  dollars  each  year  for  five  years  only  would 
give  an  institution  $300,000  for  investment.  If  each 
laborer  contributed  but  a  mite,  the  possibilities  of  such  an 
enterprise  through  the  long  course  of  years  would  prove 
attractive  to  the  best  financial  managers,  and  the  services  of 
such  would  prove  highly  beneficial,  not  only  to  the  individ- 
ual depositors  but  to  the  whole  industrial  community.  In 
a  large  city,  contributions  of  nickels  and  dimes  from  the 
many,  in  time  produce  an  enormous  fund.  The  Philadel- 
phia Savings  Funds  Society  to-day  has  accounts  which 
amount  to  over  $60,000,000,  and  this  fund  has  been  built 
up  largely  by  the  savings  of  the  servant  class. 

The  commercial  bank  must  of  necessity  keep  a  large 
percentage  of  its  capital  funds  available  for  meeting  its 
demand  credits.  It  is  organized  to  serve  a  commercial 
constituency  by  providing  current  funds  in  this  form.  As 
a  means  of  maintaining  its  demand  credit,  capital  contri- 
butions of  money  are  essential.  The  savings-bank  needs 
no  capital  stock.  A  savings  account  is  not  a  current  fund. 
Savings  depositors  do  not  ordinarily  withdraw  their  accounts 
except  in  emergencies,  or  for  some  better  ultimate  use  to 
which  the  savings  may  be  applied.  The  demands  for 
withdrawal,  therefore,  are  ordinarily  smaller  than  new  in- 
vestments of  savers.  Provision  is  usually  made  for  with- 
drawals in  excess  of  income,  but  a  reserve  of  money  is 
Savings  are  not  at  a^  essential  to  maintaining  the  credit  of 
capital  the  institution  if  proper  steps  are  taken  for  its 

protection.  The  People's  Savings -Bank  of 
Pittsburg,  for  example,  at  the  time  of  making  its  report  to 
the  State  Commissioner  of  Banking,  November  19,  1900, 
had  accounts  to  the  amount  of  $6,913,472.84,  while  it  had 
on  hand  only  $4,776  in  cash  and  cash  items.  The  Dollar 
Savings-Bank  of  the  same  place  and  on  the  same  date  had 


THE  SAVINGS-BANK  221 

$19,844,617.71  in  accounts,  and  only  $37,432  in  cash  and 
cash  items.  There  are  in  the  United  States  about  1,000 
savings  institutions,  of  which  700  are  "  mutual  " — that  is, 
they  are  institutions  operated  by  trustees  for  the  exclusive 
benefit  of  savers.  They  are  not  organized  to  make  money 
for  the  corporation,  but  to  provide  safe  investments  in  the 
form  of  interest-bearing  accounts.  The  officers  and  em- 
ployees receive  stipulated  salaries  for  services  rendered,  and 
no  dividends  are  paid  except  to  those  who  have  funds  on 
deposit.  Nearly  all  of  the  early  institutions  are  of  this  kind. 
The  first  function  of  the  savings-bank — that  of  safe 
investment  of  small  funds — may  not  be  performed  by 
building  vaults  and  storing  away  the  money  as  it  comes  in, 
and  then  paying  it  out  again  when  requested.  The  bank 
not  only  could  not  pay  interest  on  accounts,  but  would 
suffer  a  net  loss.  This  is  incompatible  with  the  prime  ob- 
ject of  the  savings  institution.  It  is  only  when  safety  is 
associated  with  income-producing  power  that  the  funds 
may  be  preserved  safely  and  undiminished.  The  second 
How  to  deal  functi°n — tnafc  of  PaJmg  an  income  on  savings 
with  a  sav-  accounts — may  be  performed  only  by  allowing 
ings-bank.  the  managers  of  tjie  bank  to  use  its  funds  in 
a  way  to  produce  revenue  for  the  institution  with  which 
to  pay  expenses,  repay  the  amount  of  the  accounts,  and 
add  thereto  an  increment  of  interest  or  dividends.  The 
success  of  an  institution  depends  upon  keeping  its  funds 
invested.  This  may  be  done  only  by  establishing  credit 
relations  with  the  depositor  on  the  one  hand  and  with 
borrowers  on  the  other.  The  credit  relation  with  the  de- 
positor is  established  in  the  following  manner :  The  laborer 
receives  his  weekly  wage  and  is  able  to  lay  by  out  of  the 
amount  received,  we  will  say,  $1  after  paying  expenses 
of  living.  In  case  he  is  employed  during  business  hours, 
his  wife  may  take  this  dollar  to  the  savings-bank.  On 
entering  the  bank  she  may  meet  a  janitor  or  usher,  who, 
learning  her  purpose,  will  show  her  a  small  wall-desk  upon 


222  FINANCIAL  INSTITUTIONS 

which  are  pen  and  ink  and  proper  blanks  to  be  filled  out. 
By  following  his  directions,  or  those  which  she  may  find 
printed  before  her,  the  "  deposit  ticket "  will  be  filled  out, 
giving  name,  address,  date,  and  amount  to  be  deposited. 
(Many  of  the  banks  make  out  the  deposit  tickets  themselves 
on  account  of  the  difficulties  experienced  in  reading  the 
entries  of  depositors.  But  the  self-executed  ticket  is  con- 
sidered preferable  by  others  on  account  of  the  evidence  of 
the  amount  deposited  being  in  the  handwriting  of  the  de- 
positor, if  dispute  arises.  This  is  oftentimes  of  advantage 
in  allaying  suspicion  of  dishonesty  on  the  part  of  an  institu- 
tion dealing  with  ignorant  people.)  The  ticket  with  the 
money  is  passed  in  at  the  window  labeled  "  Receiving  Tell- 
er." The  depositor  is  now  asked  to  step  to  the  signature- 
book  and  write  her  name,  and  give  such  information  as  to 
residence,  age,  color  of  eyes,  occupation,  domestic  relations, 
etc.,  as  may  be  considered  necessary  to  identification.  On 
the  signature- book  a  number  is  placed  opposite  the  name 
by  which  the  account  thereafter  is  to  be  known  in  all  trans- 
actions of  the  bank.  The  "  Receiving  Teller  "  then  makes 
out  a  "  Pass-book  "  on  which  this  number  is  stamped,  enters 
the  amount  deposited,  and  hands  it  to  the  depositor.  There- 
after all  moneys  deposited  are  entered  in  similar  manner. 
Now,  what  has  the  woman  in  exchange  for  her  dollar? 
The  bank  has  one  dollar  more  of  money  than  it  had  before. 
In  making  the  exchange,  the  woman  has  bought  a  credit 
obligation  of  the  bank  to  pay  her  one  dollar.  To  be  paid 
when  ?  Not  on  demand,  as  in  the  case  of  deposit  in  the 
commercial  bank,  but  after  the  prescribed  notice  (perhaps 
ten  days)  to  be  given  to  the  bank  of  the  intention  of  the 
depositor  to  withdraw.  This  rule  is  made  in  order  that 
after  notice  is  given  the  bank  may  not  invest  the  money 
paid  in  by  depositors  until  sufficient  has  been  held  back 
to  pay  withdrawals  for  which  notice  has  been  given.  After 
sufficient  coin  has  been  retained  for  this  purpose,  how- 
ever, and  for  current  expenses,  the  bank  has  no  need  for 


THE  SAVINGS-BANK  223 

holding  a  reserve,  and  the  other  money  deposited  is  free 
for  investment. 

But  what  kind  of  investment  shall  the  bank  ma^c? 
Will  it  buy  commercial  paper,  as  does  the  commercial  bank  ? 
Rules  gov-  It  would  not  be  to  its  advantage  to  do  this. 

wSniSTof  Tbe "  dePosit8 " 8old  crc  not  f or  current  use ; 

the  savings-  they  are  bought  by  the  depositor  as  an  invest- 
bank.  ment — a  long-time  investment.  Nor  can  they 

be  used  as  current  funds  on  account  of  tLc  notice  necessary 
for  withdrawal,  nnlcsc  the  bank  elects  to  have  it  so.  Since 
the  deposits  are  not  to  be  used  as  currency  with  which  to 
produce  or  to  buy  goods,  and  since  the  purchase  of  com- 
mercial paper  would  not  create  new  deposits  at  the  savings- 
bank,  it  would  only  involve  itself  in  risk  and  trouble  by  so 
doing.  The  managers  of  the  savings-bank  do  not  come 
into  immediate  business  contact  with  merchants  and  manu- 
facturers, and  have  little  opportunity  to  know  of  the  con- 
dition of  their  affairs.  But  even  if  it  could  keep  in  touch 
with  them,  such  transactions  would  be  one-sided,  and  the 
investments  in  commercial  paper  would  have  to  be  renewed 
every  thirty,  sixty,  or  ninety  days  as  the  case  might  be. 
There  are  many  reasons  which  argue  against  such  a  dispo- 
sition of  funds ;  there  is  little  in  its  favor. 

Of  all  things  that  the  savings-investment  manager  must 
take  into  account,  the  element  of  safety  is  of  most  impor- 
tance.    The  bank  wants  none  but  safe  invest- 
investin/nt       ments.      It    also  wants    long-time    instead    of 
short-time   investments.     An   investment  that 
combines  these  two  qualities,  however,  is  usually  one  of  com- 
paratively low  rate  of  income.     The  amount  of  investment 
capital  seeking  that  kind  of  employment  is  larger  in  pro- 
portion to  the  amount  of  "gilt-edge"  invest- 
incomi          nients  on  the  market  than  the  amount  of  capital 
seeking  investments  in  which  there  is  a  higher 
element  of  risk — therefore  the  lower  rate  of  interest.     The 
character  of  investments  made  by  the  conservative  savings- 


224  FINANCIAL  INSTITUTIONS 

bank  is  best  shown  by  published  reports  of  these  institu- 
tions themselves.  For  the  Philadelphia  Savings-Fund  So- 
ciety the  general  classification  of  its  investments  is  as  fol- 
lows 

Deposits  with  other  banks  and  bankers $1,028,274.98 

Call  loans  upon  collaterals 3,800.00 

Time  loans  upon  collaterals 3,500.00 

Investment  securities  owned : 

Stocks  and  bonds $45,505,169 . 75 

Mortgages 13,319,592 . 38 

Total  investment  securities  owned  .  58,824,762.13 

Total "$59,860,337.11 

This  accounts  for  its  entire  assets,  except  cash  on  hand,  real 
estate,  furniture,  and  fixtures.  A  smaller  concern,  the  Na- 
tion's Bank  of  Savings  of  Allegheny,  may  be  used  for  illus- 
tration. Its  investments  appear  as  follows  : 

Deposits  with  other  banks  and  bankers $105,333.84 

Call  loans  upon  collateral , 264,025.00 

Time,  loans  upon  collaterals 45,625.05 

Investment  securities  owned,  viz. : 

Stocks  and  bonds $33,350.00 

Mortgages 510,966.28 

Total  investment  securities  owned 544,316.28 

Total $959,300. 17 

The  first  institution  is  an  old-line  "  mutual "  company. 
The  second  is  a  "  joint-stock  "  company  with  a  capital  stock 
of  $100,000.  The  first  is  operated  by  trustees 
and  the  joint-  for  the  benefit  of  depositors.  The  second  is 
°Perate(l  by  managers  who  offer  a  certain  per- 
centage on  deposits,  as  a  fixed  charge  on  the 
gross  earnings  of  the  corporation,  the  profits  going  to  the 
stockholders  in  the  form  of  dividends.  The  policies  of  the 
two  banks  with  reference  to  investments  is  evidently  quite 
different.  The  Philadelphia  Savings-Fund  Society  has 
about  92  per  cent  of  its  funds  invested  in  bonds  and  mort- 


THE  SAVINGS-BANK  225 

gages — 75  per  cent  being  in  the  form  of  first-class  bonds. 
The  bond  investments  appear  as  follows  : 

United  States  loans,  reg.  4  per  cent $1,967,187.50 

Dist.  Columbia,  guaranteed  by  United  States 
3.65  per  cent 1,000,000.00 

Total  United  States  bonds $2,967,187.50 

Pennsylvania  State,  reg.  3}  and  4  per  cent  .  $860,000.00 

Philadelphia  City,  reg.  3fr,  4,  and  6     "         .  3,635,275.00 

Chester  City,  reg.  4  per  cent 40,000 . 00 

Allegheny  City,  reg.  4  per  cent 606,000.00 

Pittsburg  City,  reg.  4,  5,  6,  and  7  per  cent . .  1,544,900.00 

Heading  City,  reg.  4  per  cent 60,000.00 

Baltimore,  Md.,reg.andcomp.  4, 5,and  6  perct.  330.000.00 

Boston,  Mass.,  reg.  and  com  p.  4  and  5  per  cent  56,878 . 60 

Wilmington,  Del.,  reg.  4,  4£,  and  6  per  cent.  34.500.00 

Louisville,  Ky.,  comp.  4  and  7  per  cent 170.000.00 

Zanesville,  Ohio,  comp.  4£  per  cent 70.000.00 

Cincinnati,  Ohio,  comp.  7  and  7^  per  cent..  55,000.00 

Cleveland,  Ohio,  4  and  5  per  cent 203.000.00 

St.  Paul,  Minn.,  comp.  4£,  6,  and  7  per  cent  212,000.00 

St.  Louis,  Mo.,  comp.  4  per  cent 101,000.00 

Toledo,  Ohio,  comp.  4^  per  cent 115,775.00 

Woodbury,  N.  J.,  comp.  4  per  cent 62,000.00 

New  York  City,  reg.  3f  per  cent 800,000.00 

Total  city  and  State  bonds $8,095,328.60 

Bonds  of  counties  and  boroughs,  4  to  6  per  cent 549,000.00 

Total  municipal  and  Government  bonds $11,923,615.10 

First-class  railway  bonds 33,581,554.65 

Total $45,505,169.75 

Of  the  railway  bonds,  about  one-fourth  were  held  against 
the  Pennsylvania  Railroad,  financially  one  of  the  strongest 
corporations  in  existence,  and  another  one-fourth  were  held 
against  the  New  York  Central,  the  Erie,  the  Lehigh,  and 
the  Northern  Pennsylvania  Railroads.  No  shares  of  stock 
whatever  were  held.  Nearly  all  of  the  bonds  are  what  are 
known  in  the  market  as  "  gilt  edge." 

The  Nation's  Bank   of  Savings  had  only  about  3  per 
cent  of  its  funds  invested  in  bonds,  and  these  were  entirely 
local  and  industrial.    It  had  50  per  cent  of  its  assets  invested 
16 


226  FINANCIAL  INSTITUTIONS 

in  mortgages.  It  is  to  be  presumed  that  these  were  also 
largely  local  and  industrial.  Fifty-four  per  cent  as  against 
92  per  cent  in  bonds  and  mortgages,  and  those 
Comparison  Qf  an  mferior  type  in  the  general  security  mar- 
ket! About  10  per  cent  of  its  funds  were 
"  on  deposit "  in  other  banks,  while  30  per  cent  were  invested 
in  commercial  paper — short-time  loans  secured  by  collateral. 
The  loans  of  this  character  made  by  the  Philadelphia  insti- 
tution amounted  to  about  one-tenth  of  1  per  cent.  Whether 
this  difference  grows  out  of  the  joint-stock  interest  of  its 
managers  will  not  be  said,  but  certain  it  is  that  the  Alle- 
gheny concern  is  quite  as  closely  allied  with  the  commercial 
interests  as  it  is  with  the  interests  of  the  working  man. 

The  deposits  that  go  to  the  savings  bank  are  usually  in 
the  form  of  minor  coins,  silver,  and  what  is  generally  con- 
Relatiuniof  s^ered  "change/'  The  collection  of  such 
savings-bank  money  gives  the  bank  a  double  importance  in 
%stem>im>f'J  its  re'lation  to  tlie  money  system  of  the  coun- 
try. It  reduces  the  amount  of  small  change 
that  the  Government  would  otherwise  be  called  on  to  fur- 
nish to  the  people.  By  providing  a  method  for  the  safe- 
keeping of  funds,  (1)  it  reduces  the  amount  of  money  that 
would  go  into  hoards,  and  thereby  reduces  the  demand  on 
the  Government;  (2)  it  indirectly  sets  up  a  chain  of  re- 
demption through  the  Treasury.  The  savings-bank  also 
has  an  important  relation  with  the  fiscal  side  of  the  Treas- 
ury. When  an  issue  of  bonds  is  offered  for  sale,  these 
institutions  are  among  the  largest  purchasers.  They  there- 
fore facilitate  the  funding  process  of  the  Government.  In 
1899  the  savings-banks  had  investments  amounting  to 
$137,000,000  in  United  States  bonds.  The  total  deposits 
of  that  year  were  $2,179,468,299.  Their  income  amounted 
to  over  $5,000,000  per  month,  while  cash  on  hand  averaged 
about  $100,000,000.  These  banks  are  therefore,  under 
ordinary  circumstances,  in  a  position  to  absorb  a  large  issue 
of  public  securities. 


THE  SAVINGS-BANK  227 

The  business  relations  of  the  savings  institution  to  the 
commercial  bank  are  largely  represented  by  its  "  deposits  " 

in  those  banks.  There  are  times  when  with- 
fav^Tbank  drawals  exceed  deposits ;  in  periods  of  panic — 
to  other  times  when  those  having  securities  and  other 

^institutions  Pr°Perties  must  realize  on  them  at  once  in  order 

to  meet  present  credit  obligations,  when  sales 
of  securities  are  made  at  a  sacrifice— many  depositors  of 
savings  may  find  it  to  their  interest  to  exchange  their  sav- 
ings investments  for  the  properties  offered  for  sale;  in 
times  of  depression  also,  when  the  laboring  constituency  of 
the  savings  institution  is  out  of  employment,  large  withdraw- 
als may  be  necessary  to  meet  living  expenses.  If,  upon  such 
occasions,  the  savings  institutions  do  not  have  a  part  of  their 
investments  in  such  form  that  they  may  be  readily  con- 
verted without  loss,  they  may  become  embarrassed.  Their 
constituency  may  become  frightened  and  begin  a  "  run." 
Such  occasions  of  emergency  and  adversity  suggest  to  the 
savings  manager  the  desirability  of  keeping  a  considerable 
part  of  the  institution's  funds  "  deposited  "  in  one  or  more 
commercial  banks  at  a  low  rate  of  interest.  The  percent- 
age of  funds  "deposited"  will  vary  with  the  circumstances 
of  each  institution.  The  commercial  banks  are  always 
ready  and  willing  to  sell  credit  accounts — that  is,  to  buy 
cash  from  the  savings-banks  with  their  own  demand  credit, 
and  pay  from  1£  to  2£  per  cent  for  the  time  that  payment 
is  deferred.  It  is  of  advantage  to  the  commercial  bank  to 
receive  deposits  from  the  savings-bank,  because  the  money 
thus  deposited  strengthens  its  reserve,  and  enables  it 
to  exchange  a  larger  amount  of  bank  credit  for  loans.  The 
low  rate  of  interest  paid  by  the  commercial  bank  to  sav- 
ings institutions  on  deposits,  however,  makes  it  quite  im- 
perative that  the  savings-bank  keep  only  such  amount  in- 
vested in  this  way  as  business  safety  requires.  It  sometimes 
happens  that  those  who  manage  savings  institutions  have  a 
personal  interest  in  keeping  deposits  in  other  institutions. 


228  FINANCIAL  INSTITUTIONS 

When  this  is  the  case  they  are  wholly  unfitted  to  remain  in 
fiduciary  relations  to  depositors.  In  some  States,  statutes 
have  been  passed  regulating  the  qualifications  of  officers  in 
savings  institutions.  Past  experience  has  suggested  the 
propriety  of  such  laws. 


CHAPTER  XI 
THE  BUILDING  LOAN  ASSOCIATION 

LITTLE  more  than  a  quarter  of  a  century  had  passed  be- 
fore the  principle  of  saving  was  applied  in  a  different  way. 
The  savings-bank  gave  to  the  wage-earner  an  opportunity 
safely  to  invest  his  surplus  dimes  and  dollars  until  he  wished 
to  use  his  capital  for  industrial  purposes  or  until  he  could 
employ  them  to  greater  advantage  in  an  independent  way. 
This  gave  the  best  of  encouragement  to  saving  and  to  the 
accumulation  of  funds  for  capital  use.  The  Building  Loan 
Association  was  an  inventing  institution  which  advanced 
to  the  wage-earner  funds  for  his  immediate  use  on  the  se- 
curity of  his  future  savings.  It  has  been  noted  that  the 
savings-bank  sells  interest-bearing  book-accounts  to  cus- 
tomers and  then  invests  the  funds  deposited  in  "  gilt-edge  " 
securities  of  other  concerns  which  bear  a  slightly  higher 
rate  of  interest  than  the  rate  paid  to  depositors.  The  Build- 
ing Loan  Association  receives  a  definite  amount  of  money 
each  month  as  a  payment  on  stock  held  by  members  of  the 
association ;  the  company  then  invests  the  amounts  received 
in  loans  to  its  members — the  members  having  the  profits 
from  the  loans  applied  to  the  balance  due  on  stock.  For 
example,  an  association  is  formed  with  a  thousand  mem- 
bers ;  each  member  takes  one  share,  the  par  value  of  which 
is  $100 ;  he  pays  down  $1,  and  agrees  to  pay  $1  per  month 
on  the  stock  till,  with  the  accumulated  profits,  the  stock  is 
paid  for.  This  gives  to  the  association  an  income  from 
stock  payments  of  $1,000  per  month,  which  may  be  loaned 


230  FINANCIAL  INSTITUTIONS 

to  its  members  on  such  terms  as  may  be  provided  under  its 
rules. 

The  distinguishing  characteristics  of  the  Building  Loan 
Association  are  the  following :  (1)  Usually  every  borrower 

from  the  association  is  a  stockholder — that  is, 
The  distin- 
guishing        the  company  can  not  invest  in  any  credit  obh- 

featuresof  orations  or  securities  other  than  those  of  its 
the  Building  & 

Loan  members ;  it  is  a  close  corporation  both  as  to 

Association,  membership  and  as  to  dealing.  (2)  The  capital 
of  the  corporation  is  not  represented  by  the  amount  of 
stock  outstanding,  but  by  the  amount  of  the  combined  sav- 
ings, interest,  and  premiums  paid  in  by  its  members  after 
deducting  expenses.  To  put  it  in  the  language  of  the 
Ninth  Annual  Report  of  the  Department  of  Labor:  "The 
stockholder  or  member  pays  a  stipulated  minimum  sum, 
say  one  dollar,  when  he  takes  his  membership  and  buys  a 
share  of  stock.  lie  then  continues  to  pay  a  like  sum  each 
month  until  the  aggregate  of  sums  paid,  augmented  by  the 
profits,  amounts  to  the  maturing  value  of  the  stock,  usually 
$200,  and  at  this  time  the  stockholder  is  entitled  to  the  full 
maturing  value  of  the  share  and  surrenders  the  same.  It 
is  seen  clearly,  then,  that  the  capital  of  a  building  loan 
association  consists  of  the  continued  savings  of  its  members, 
paid  to  the  association  upon  shares  of  stock,  increased  by 
the  interest  and  premiums  which  the  association  has  received 
from  loans  made  by  it  from  the  savings  of  its  members  thus 
paid  to  the  association,  and  from  all  other  sources  of  income. 
The  amount  of  the  capital  of  the  association,  therefore,  in- 
creases from  month  to  month  and  from  year  to  year.  Shares 
are  usually  issued  in  series.  When  a  second  series  is  issued, 
the  issues  of  stock  of  a  prior  series  cease.  Profits  are  dis- 
tributed and  losses  apportioned  before  a  new  series  issue. 
The  term  during  which  a  series  is  open  for  subscription  dif- 
fers, but  it  usually  extends  over  three  or  six  months,  and 
sometimes  a  year.  Prior  to  the  maturing  of  a  share  it  has 
two  values :  one  is  called  the  holding  (or  book  value),  and 


THE  BUILDING  LOAN  ASSOCIATION  231 

the  other  is  called  the  withdrawal  value.  The  former  is 
ascertained  bj  adding  all  the  dues  that  have  been  paid  to 
the  profits  that  have  accrued — that  is  to  say,  the  holding 
value  is  the  actual  value  of  a  share  at  any  particular  time ; 
the  withdrawal  value,  on  the  contrary,  is  that  amount  which 
an  association  is  willing  to  pay  to  a  stockholder  who  desires 
to  sever  his  connection  with  the  association  prior  to  the  date 
at  which  his  share  matures.  Every  association  has  full  regu- 
lations on  all  such  matters,  as  well  as  on  matters  pertaining 
to  expenses,  notice  of  withdrawal,  and  all  the  methods  and 
processes  necessary  for  safe  conduct  of  the  business.  The 
purchase  of  a  share  binds  the  stockholder  to  the  necessity 
of  keeping  up  his  dues,  and  this  secures  to  him  not  only 
all  the  benefits  of  a  savings-bank,  but  the  benefit  of  con- 
stantly accruing  compound  interest." 

The  character  of  the  institution  is  especially  adapted  to 
real-estate  loans  and  to  the  service  of  a  home-building  con- 
stituency in  a  community  where  funds  for  this 
Conditions  J  J  -,-,... 

out  of  which    kind  of  investment  are  scarce.     In  fact,  it  is 

°Ut  °f  JU8t  8UC^  a  situation  tliat  tlie  Building 
Loan  Association  arose.  The  first  organiza- 
tion of  the  kind  about  which  we  have  any  information 
was  founded  January  3,  1831,  in  Frankford,  a  suburb  of 
Philadelphia.  Philadelphia  was  a  fast-growing  industrial 
center.  Frankford  was  an  industrial  suburb.  As  compared 
with  other  large  cities,  Philadelphia  has  little  interest  in 
public  institutions;  the  center  of  interest  for  a  Philadel- 
phian  is  his  home.  It  is  not  strange,  therefore,  that  the 
home-building  corporation  found  its  first  development 
there.  The  laboring  population  at  that  time  could  obtain 
little  aid  from  established  institutions ;  reliance  on  future 
savings,  as  part  security  for  a  loan,  was  not  looked  on  with 
favor.  The  Oxford  Provident  Building  Association  was 
organized  to  meet  the  demand  for  funds  for  home  building 
among  people  who  relied  on  wages  for  income.  It  was  not 
until  a  decade  later  that  the  success  of  the  Frankford  institu- 


232  FINANCIAL  INSTITUTIONS 

tion  commended  the  general  adoption  of  such  a  plan  to  meet 
the  demands  of  other  home- building  constituencies.  Be- 
tween 1840  and  1850  the  Building  Loan  Association  took  a 
place  among  the  financial  institutions  of  most  of  the  indus- 
trial centers.  The  great  growth  of  associations  of  this  kind 
came  later ;  their  numbers  gradually  increased  till,  in  the 
latter  part  of  the  century  just  closed  their  popularity  began 
to  decline.  This  was  largely  duo  to  the  fact  that  the  sav- 
ings-banks and  other  financial  institutions  had  accumulated 
such  enormous  investment  funds  that  interest  on  well-secured 
loans  fell  below  the  rate  which  would  make  the  special 
building  fund  profitable  to  its  members.  The  savings-banks, 
especially,  devised  plans  for  application  of  savings  to  the 
reduction  of  principal  in  such  a  way  that  they  found  a  safe 
plan  of  investment  and  could  oiler  a  low  interest  rate. 

In  1893,  at  the  time  the  special  report  was  made  to  the 
Government  b}7  the  Department  of  Labor,  there  were  in 
the  United  States  5,838  associations  with  assets  amounting 
to  something  over  $500,000,000.  Through  the  aid  of  the 
5,440  associations  reporting  to  the  Commissioners  of  Labor, 
314,755  homes  and  28,450  other  structures  had  been  built. 
Magnitude  ^ie  ms^orj  °f  the  loans  showed  only  8,409  fore- 
of  business  closures,  with  a  loss  of  only  $449,599,  or  less 
than  1  per  cent  for  the  entire  life  of  the  com- 
panies. The  magnitude  of  the  business  transacted,  together 
with  the  stability  and  success  of  their  undertakings,  suggest 
a  more  detailed  description  of  financial  plans. 

As  stated  before,  loans  are  usually  confined  to  members. 
While  this  is  the  general  rule,  it  finds  variance  in  some  of 
Plans  for  ^ne  companiee  when  there  is  no  demand  from 
making  members  for  loanable  funds.  From  the  stock- 
holders two  classes  of  security  are  taken,  viz., 
(1)  mortgage  liens  on  the  property  to  be  improved,  and  (2) 
collateral  deposits  of  stock  in  the  association.  Usually, 
however,  the  holders  of  unencumbered  shares  may  obtain 
temporary  loans  on  security  of  their  stock  alone  to  the 


THE  BUILDING  LOAN  ASSOCIATION  233 

amount  of  its  withdrawal  value.  There  are  about  70  plans 
employed  for  the  making  of  loans  among  the  various  com- 
1  Loans  at  a  Pames-  A  f ew  °f  these  associations  loan  money 
fixed  rate  by  to  the  members  at  a  fixed  rate  without  premium. 

These  usually  r^ive  the  privilege  of  obtaining 
loans  in  order  of  application  or  by  lot.  In  most  cases  the 
loanable  funds  are  put  up  at  auction  and  sold  to  the  highest 

bidder.     One  of  the  favorite  plans  of  auction 

2.  bales  at  ,     .      ,       .   „  T  .  ..       n 

auction—  sale  is  the  following:  interest  is  set  at  a  nxed 
Advance  of  rate  (let  us  say  12£  cents  per  week  on  $100). 
A  member  secures  a  loan  of  $1,000.  To  do 
this  he  subscribes  for  5  shares  of  $200  each,  which  en- 
titles him  to  become  a  bidder  for  the  amount  desired.  He 
then  enters  the  tield  of  competition  at  an  open  meeting  of 
the  association,  offering  to  pay  a  certain  number  of  weeks' 
interest  in  advance.  Let  us  assume  that  he  gets  the  money 
oh  a  bid  for  prepayment  of  25  weeks'  interest.  The  bor- 
rower would  then  receive  $1,000,  less  $31.25,  the  amount 
covered  by  this  bid,  or  a  net  sum  of  $968.75.  Then  for 
the  first  25  weeks  he  would  be  exempt  from  interest  pay- 
ments, after  which  he  would  pay  the  regular  interest  con- 
tracted for.  By  a  number  of  plans  loans  are  awarded  to 
stockholders  bidding  a  premium  on  the  stock  instead  of 
competing  for  loans  by  advance  of  a  definite  amount  of  in- 
terest. One  of  the  most  used  of  these  provides 
^bidd^rof  {°  for  a  premium  to  be  paid  in  the  nature  of  a 
highest  fixed  percentage  of  dues — the  amount  bid  to  be 

%H£*m°*  added  to  the  regular  monthly  dues  on  the 
stock.  In  this  case  the  borrower  receives  the 
full  amount  of  the  loan  and  pays  an  interest  rate  established 
by  the  rules  of  the  association.  To  illustrate :  A  person 
wishes  to  obtain  $2,000.  He  becomes  an  applicant  for  10 
shares  of  stock  which  have  a  maturing  value  of  $200  each. 
Attending  the  meeting  for  the  auction  sale  of  money  to  be 
loaned,  he  makes  a  bid  by  which  he  agrees  to  pay  the  regu- 
lar dues  of  $1  per  share  per  month  and  10  per  cent  addi- 


234  FINANCIAL  INSTITUTIONS 

tional  as  premium.  That  is,  on  10  shares  he  will  pay  $10 
per  month  dues,  $1  per  month  premium,  and  interest  on 
his  loan  at  the  rate  of  6  per  cent  per  annum  (if  that  is  the 
established  rate),  or  $10  per  month  interest.  The  $2,000 
will  cost  him  $21  per  month  until  the  stock  matures,  by  ap- 
plication of  dues  and  profits,  when  he  may  cancel  his  loan 
by  surrender  of  his  stock  if  he  chooses.  By  another  plan 
the  interest  payments  are  proportionally  reduced  with  each 
application  of  dues  to  principal.  In  this  case  the  member 
foregoes  his  right  to  participate  in  the  profits  of  the  associa- 
tion. Again,  the  interest  rate  may  be  reduced  periodically. 
The  variety  of  plans  for  maturing  loans  is  such  that  chap- 
ters might  be  written  without  exhausting  all  the  details. 
The  illustration  as  given  will  serve  as  an  expose  of  princi- 
ples. A  more  complete  analysis  will  be  found  in  the  report 
above  referred  to  and  in  the  special  treatises  on  the  subject. 
An  interesting  feature  of  the  Building  Loan  Association 
is  the  plan  for  the  distribution  of  profits.  It  has  already 

Plans  for          ^GGn  8a^  tn&t  tn6  C'U6S  an(*  Pronts  are  a^ded  to 

the  distribu-    the  maturing  or  book  value  of  shares  held  by 
h°™f°/s  members.     That  is  to  say,  the  amount  of  the 

earnings  of  the  company  after  payment  of  ex- 
penses is  distributed  to  the  credit  of  the  balance  due  to 
the  company  on  deferred  stock  payments.  The  appli- 
cation of  items  of  profit,  therefore,  hastens  the  time  when 
the  borrower  may  surrender  his  stock  in  full  payment  of 
his  loan.  With  a  company  having  only  one  series  of 
stock — i.  e.,  a  company  which  terminates  with  the  comple- 
tion of  the  stock  payments  of  its  members  and  the  conse- 
quent maturity  of  its  loans — the  plan  of  profit-sharing  may 
be  a  comparatively  simple  one.  Let  us  suppose  that  a  com- 
pany were  organized  with  1,000  members,  each  holding  one 
share,  the  maturing  value  of  which  will  be  $200.  If  each 
member  pays  $1  at  the  time  of  taking  out  the  stock,  and 
then  pays  dues  at  the  rate  of  $1  per  month  till  the  stock 
matures ;  if,  also,  interest  on  loans  is  fixed  at  6  per  cent  per 


THE   BUILDING  LOAN  ASSOCIATION 


235 


annum,  payable  monthly,  then  at  the  time  of  organization 
the  company  would  have  in  its  treasury  $1,000.  At  the 
end  of  each  month  $1,000  more  would  be  added  by  pay- 
ment of  dues.  In  estimating  the  book  value  and  time  of 
maturity  of  the  stock,  however,  interest  received  on  loans 
would  have  to  be  reckoned  with.  At  the  end  of  the  first 
month  the  amount  paid  into  the  treasury  would  be  $1,000 
+  $5  interest  on  the  loan  of  the  month  before.  This  $1,005 
would  be  loaned  at  6  per  cent  interest  payable  monthly,  as 
a  result  of  which  the  treasurer  would  receive  $5  -f  $5.02, 
or  $10.02  in  addition  to  the  $1,000  dues.  Again,  this 
$1,010.02  would  be  loaned  at  6  per  cent.  At  the  end  of 
three  months  the  return  would  be  $5  -{-  $5.02  -j-  $5.05,  or 
$15.07  in  addition  to  the  $1,000  payments  of  members. 
Assuming,  therefore,  that  the  borrowers  would  pay  the 
expense  of  making  loans,  and  that  the  entire  amount  re- 
ceived were  put  at  interest,  the  dues  and  profits  for  the 
year  would  be  as  follows  : 


LENGTH  OF 

INVESTMENT. 

Amount  of 
clues  paid  in  by 
members  each 
month. 

Amount  of 
interest  paid 
each  month. 

Total  amount 
paid  in  each 
month. 

Total  book 
value  of 
each 
share. 

Profits 
per 
share. 

1st  month. 

11,000.00 

$5.00.2 

$1,005.00.0 

$1.00 

4.005 

2d 

1,000.00 

5.02.5 

1,010.02.5 

2.01 

.01 

3d 

1,000.00 

5.05.0 

1,015.07.5 

3.03 

.03 

4th      " 

1,000.00 

5.07.5 

1,020.15.0 

4.05 

.05 

5th      " 

1,000.00 

5.10.0 

1,025  25.0 

5.07 

.07 

6th      " 

1,000.00 

5.  12.  G 

1,030.27.6 

6.10 

.10 

7th      " 

1,000.00 

5.15.5 

1,035.52.5 

7.14 

.14 

8th      " 

1,000.00 

5.17.7 

1,040.70.5 

8.18 

.18 

9th      " 

1,000.00 

5.20.5 

1,045.91  .# 

9.22 

.22 

10th      " 

1,000.00 

5.22.3 

1,051.13.7 

10.28 

.28 

llth      " 

1,000.00 

5.25.5 

1,056.39.2 

11.33 

.33 

12th    .  " 

1,000.00 

5.28..? 

1,061.67.5 

12.39 

.39 

Total  .... 

$12,OOO.CO 

$61.67.5 

$12,397.22.9 

In  this  the  problem  is  simply  one  of  computing  and  com- 
pounding interest  on  loans  made,  and  dividing  the  total 
interest  received  during  a  definite  period  by  the  number  of 


236  FINANCIAL  INSTITUTIONS 

shares  outstanding,  thus  giving  the  rate  of  profit  per  share. 
By  adding  profits  to  dues  paid  in,  the  book  valuation  is  de- 
termined. The  withdrawal  valuation  is  fixed  by  the  rules 
of  the  company.  It  is  usually  something  below  the  book 
valuation,  and  for  this  another  column  may  be  added  and 
the  office  record  is  complete.  With  interest  and  other 
tables  at  hand,  the  entries  may  be  made  by  the  secretary  at 
the  end  of  each  month  before  the  monthly  meetings. 

When,  however,  new  series  are  started  each  year,  the 
computation  becomes  more  complex.  There  are  between 
20  and  30  plans  employed  by  the  associations  for  the  dis- 
tribution of  profits  to  serial  stockholders.  One  of  these 
plans  is  the  same  as  that  commonly  used  for  the  determina- 
tion of  partnership  profits  when  partners  have  entered  a 
business  at  different  times,  each  series  representing  a  part- 
ner. To  illustrate:  Let  us  suppose  that  an  association 
whose  monthly  dues  are  $1  per  share  has  three  series  in 
force  at  the  end  of  the  third  year,  with  a  fourth  series  just 
issued;  that  the  number  of  shares  in  each  series  and  the 
book  valuation  per  share  at  the  end  of  the  third  year  are 
as  follows : 

(1)  Series  1 500  shares,  value  per  share $38.87 

(2)  Series  2 600  shares,  value  per  share 25.27 

(3)  Series  3 400  shares,  value  per  share 12.32 

(4)  Series  4 4,500  shares,  value  per  share 00.00 

Let  us  suppose  that  the  net  profits  for  the  fourth  year 
are  $3,000.  It  is  evident  that  a  fair  distribution  of  profits 
must  have  reference  to  the  value  of  the  shares.  To  deter- 
mine this,  however,  the  profits  of  previous  years  are  also 
taken  into  consideration.  The  total  net  profit  of  the  com- 
pany up  to  this  time  we  will  assume  to  be  $5,325.  The 
problem  is  to  find  the  earnings  on  each  share  at  the  end  of 
the  fourth  year.  Justice  to  all  parties  requires  that  the 
holdings  of  members  be  reduced  to  some  common  basis. 
Since  each  stockholder  pays  in  $1  per  month,  the  first  dol- 
lar paid  on  Series  No.  1  has  run  for  48  months ;  the  sec- 


THE  BUILDING  LOAN  ASSOCIATION  237 

ond,  47  months ;  the  third,  46  months,  etc.,  to  the  last  dol- 
lar, which  has  run  only  1  month.  The  average  length  of 
time  that  each  dollar  has  run  in  this  series,  therefore,  is 

— ,  or  244  months.     In  Series  2  the  first  dollar  paid 
a 

has  run  36  months,  while  the  last  has  run  but  1  month. 
The  average  length  of  time  for  this  series  is  found  to  be 

J"   ,  or  18£  months.     The  average  for  Series  3,  bj  the 

24-4-1 

same  process,  is  found  to  be  -     — ,  or  12£  months,  while 

& 

the  average  for  Series  4  is  only  — i_,  or  6£  months.     The 

a 

stockholders  of  the  first  series  have  paid  in  $500  per  month. 
This  multiplied  by  48  will  give  the  total  amount  invested 
by  them.  Members  holding  stock  in  the  second  series  pay 
in  $600  per  month,  which  amount  multiplied  by  36  gives 
their  capital  investment.  The  third  series  pays  $400  per 
month,  and  is  multiplied  by  24.  The  fourth,  paying  $500 
per  month,  is  multiplied  by  12.  All  of  these  shares  are 
reduced  to  a  $1  investment  level  by  multiplying  the  num- 
ber of  dollars  paid  in  in  each  series  by  the  average  time 
that  the  series  has  run.  The  result  is  as  follows : 

Series  1 $500  x  48  =  $24,000  x  24J  =  $588,000 

Series  2 600x36=    21,600  x  18*  =  399,600 

Series  3 400  x  24  =      9.600  x  12^  =  120,000 

Series  4 500  x  12  =      6,000  x    64  =  39,000 

Total  investment  for  one  month $1,146,600 

Using  the  total  $1,146,600  as  a  common  denominator, 
an  apportionment  is  made : 

SerieS  *'  1146 600 °rrlf  X  *S,825  =  $2,730.77  +  500  =  $5.46  per  share. 
J^x    5,325=   1,855.81  H- 600  =   3.09    •'       " 
^x    5,325=      557.30 -H  400  =   1.39    "       " 
X    5>325=      181.12  +  600=0.86-       " 


238  FINANCIAL  INSTITUTIONS 

Distributing  the  profits  thus  determined  to  the  several 
shares  their  book  values  will  be  : 

Series  1 $48  +  $5.46  =  $53.46  per  share. 

SeriesS 36+     3.09=     39.09"       " 

Series  3 24+     1.39=     25.39  " 

Series4 12+     0.36=     12.36  "       « 

In  apportioning  the  profits  by  this  plan  it  is  necessary  to 
allow  compensation  for  stock  sales  made  at  different  times,  so 
that  all  parties  within  one  series  may  be  on  a  common  footing. 
Other  plans  of  profit-sharing  will  not  be  discussed  here. 

The  theory  of  a  share  in  a  building  loan  association 
is,  "  that  when  the  periodical  dues  paid  thereon,  together 
with  the  profits  earned  thereby,  amount  to  the 
ultimate,  or,  technically,  the  maturing  value  of 
the  shares,  the  holders  shall  be  entitled  to  re- 
ceive, in  cash,  such  value,  if  the  shares  have  not  been 
pledged  for  loans ;  if  pledged  for  loans  equal  in  amount  to 
the  maturing  value,  then  the  loans  shall  be  canceled ;  if 
the  loans  do  not  equal  the  amount,  the  maturing  value  of 
the  pledged  shares,  then  the  holder  shall  receive  in  cash 
the  difference  between  the  amount  of  the  loans  and  the 
maturing  value  of  the  shares."  It  sometimes  happens,  how- 
ever, that  a  stockholder  may  wish  to  withdraw  before  the 
maturity  of  the  series  in  which  he  is  interested.  This  makes 
the  adoption  of  some  plan  necessary  to  render  substantial 
justice.  This  is  usually  determined  by  the  rules  of  the 
company  at  the  time  of  its  organization  and  becomes  a  part 
of  the  investment  contract.  One  plan,  employed  by  about 
200  associations,  allows  the  withdrawing  stockholder  to  re- 
ceive only  the  dues  paid  in  on  his  own  shares,  the  profits 
earned  being  retained  for  the  benefit  of  those  who  remain 
until  the  series  is  closed  or  matured. 

By  another  plan  the  withdrawing  stockholder  receives 
dues  paid  in  together  with  interest  on  the  amount  at  a 
fixed  rate ;  this,  however,  being  below  the  rate  earned  by 
the  stock  in  his  series. 


THE  BUILDING  LOAN  ASSOCIATION  239 

Again,  the  full  profit  earned  may  be  paid  on  withdrawal, 
subject,  however,  to  such  fines,  penalties,  and  dues  unpaid 
as  may  stand  on  the  books,  together  with  a  withdrawal 
fee  prescribed  by  the  rules  of  the  company.  A  com- 
mon practise  is  to  allow  a  definite  proportion  of  the 
earned  profits,  as,  for  example,  75  per  cent,  the  remainder 
reverting  to  the  series.  This  proportionate  rate  may  be 
conditioned  on  the  time  that  the  stock  is  run,  the  percent- 
age of  discount  diminishing  with  the  length  of  time  of  the 
investment. 

There  are  12  distinct  plans  described  in  the  Government 
report  above  referred  to.  Provision  is  usually  made  in  the 
constitution  and  by-laws  of  companies  for  the  giving  of 
notice  by  stockholders  desiring  to  withdraw.  It  is  also 
usually  provided  that  only  a  percentage  of  funds  received 
may  be  used  to  pay  withdrawals.  If  notices  of  withdrawal 
call  for  more  than  the  amount  available  for  this  purpose, 
the  applicant  must  wait  until  there  are  sufficient  funds  in 
the  treasury.  It  is  this  feature  that  protects  the  building 
and  loan  association  from  danger  of  bankruptcy.  When  all 
expenses  are  paid  by  fees  and  charges  made  at  the  time  that 
loans  are  contracted  for  or  stock  is  issued,  the  company  can 
not  become  a  bankrupt  for  the  reason  that  no  fixed  or  cur- 
rent charges  can  arise  which  will  shorten  the  life  of  the  in- 
stitution ;  there  are  no  current  liabilities  to  meet.  Obliga- 
tions are  only  to  members  or  stockholders. 


CHAPTER  XII 
THE  COMMERCIAL  BANK 

IN  getting  together  materials  and  organizing  service  for 
business  on  a  modern  basis,  of  highest  importance  are  ar- 
The  service  rangements  for  current  funds — cash  resources. 
of  the  com-  These  are  necessary  to  exchange.  Neither 

mercial  bank  J  ..      &  -  .,,    , 

to  a  commu-     mechanical    equipment,    supplies,    nor    skilled 

labor  can  be  obtained  to  advantage  without  a 
working  cash  capital.  He  who  is  prepared  to  furnish  such 
funds  is  equipped  to  render  a  service  for  which  the  farmer, 
the  manufacturer,  and  the  merchant — all  who  are  engaged 
in  the  active  management  of  industry — are  willing  to  pay. 
To  illustrate :  Brown  has  purchased  a  mill  and  water-power 
conveniently  located  on  the  edge  of  the  great  wheat  belt. 
For  this  he  has  paid  $150,000,  but  many  of  the  machines  are 
antiquated,  and  expensive  to  operate.  Sixty  thousand  dol- 
lars more  are  expended  in  improvements.  He  now  has  his 
mechanical  equipment.  Still  there  is  much  lacking.  Grain 
must  be  purchased ;  labor  must  be  employed  and  wages 
paid ;  transportation  charges  must  be  settled,  and  current 
expenses  must  be  met.  All  these  outlays  must  be  made 
before  return  may  be  had  on  sales  of  goods  purchased.  He 
Necessity  for  must  look  for  profits  for  the  year  in  the  margin 

current  funds  of  gam  between  total  outlay  and  total  receipts 

in  the  capi-  g  .  J 

talization  of    from  sales  measured  in  terms  of  the  common 

industry.  standard  of  value.  The  outlay  must  be  made 
weeks  before  return  is  had,  and  this,  too,  must  be  commen- 
surate with  the  size  of  the  working  plant  and  the  volume 
of  business  handled.  The  element  of  time  necessary  to  the 
240 


THE  COMMERCIAL  BANK  241 

most  advantageous  production  and  distribution  of  goods 
requires  that  he  provide  a  working  capital  (current  funds) 
of  about  $100,000. 

The  question  now  presents  itself,  How  shall  these  funds 
be  carried  ?     Shall  he  lay  in  a  stock  of  money  ?     A  delivery 

of  gold  will  satisfy  demands  on  contracts  for 
Obstacles  to      ,  ,  °         ,         .     •  i     i_    .  .1      j 
business          labor  and  material ;  but  the  dangers  entailed  in 

without  a  keeping  such  an  amount  of  money  as  is  needed, 
the  breadth  of  the  field  covered  in  his  business 
transactions,  the  variety  of  interests  involved,  and  the  num- 
ber of  payments  to  be  made,  would  render  this  a  highly  ex- 
pensive form  of  cash  assets.  Every  consideration  disposes 
him  toward  a  more  economical  form  of  "  current  funds,"  if 
such  may  be  had.  But  the  miller  is  not  alone  in  this  desire. 
His  is  not  the  only  business  interest  in  the  community.  Falls 
City,  the  place  where  Brown's  mill  is  located,  is  a  town  of 
10,000  inhabitants.  There  are  a  number  of  other  industries, 
each  of  which  is  in  need  of  working  capital.  The  town  is 
a  local  trade  center,  and  merchants  of  every  class  are  there 
with  stocks  of  goods  to  supply  the  wants  of  country  and  town. 
If  money  were  the  most  available  means  of  effecting  ex- 
changes, each  would  suffer  the  same  inconvenience — each 
would  be  under  the  necessity  of  keeping  a  "  strong  box," 
fire-proof  and  burglar-proof ;  even  then  they  would  not  be 
secure  against  loss.  Current  funds  are  an  absolute  neces- 
sity ;  with  a  stock  of  money  provided,  each  would  have  to 
keep  a  guard,  for  no  box  is  too  strong  to  be  "  cracked " 
with  modern  instruments,  and  there  is  no  combination  lock 
that  may  not  be  "  worked "  if  time  and  opportunity  be 
given.  The  expense  and  risk  of  the  money  system  would 
not  end  here.  Brown  is  doing  a  business  that  would  in- 
volve the  handling  of  from  $5,000  to  $20,000  per  day; 
much  of  this  outlay  is  made  in  transactions  of  small  amount ; 
it  would  be  necessary  to  have  a  comparatively  large,  highly 
paid,  and  responsible  clerical  force  to  count  out  the  money 
and  make  change.  The  business  organization  of  the  whole 
17 


242  FINANCIAL  INSTITUTIONS 

place  would  be  encumbered  with  expense  and  inconvenience, 
and  transactions  at  a  distance  would  be  made  extremely  dif- 
ficult. Such  conditions  as  these  furnish  the  business  oppor- 
tunity for  such  service  as  the  commercial  bank  is  organized 
to  render.  The  service  and  the  profits  made  and  the  mutual 
advantages  gained  by  the  first  bank  in  Falls  City  suggests 
the  organization  of  another,  and  still  another,  until  at  the 
present  time  there  are  six  banks  in  the  place,  all  doing  a 
thriving  business. 

With  this  equipment,  instead  of  carrying  a  large  amount 
of  money  in  purses  and  vaults,  and  keeping  a  guard  and  a 
1  Bunk  fur  ^arSe  corPs  °f  money-changers,  the  miller  has 
nisties  cur-  on  his  desk  a  "check-book."  His  $100,000 

?he/ormofn  " cash "  CilP[iiil  is  divided  between  his  local 
"bank  town  and  New  York.  Temporarily  he  has 

$50,000  in  gold  locked  up  in  "safe  deposit." 
This  he  withdraws  and  sends  by  express  from  New  York 
to  Falls  City.  On  arrival  at  his  place  of  business  he  orders 
the  express  company  to  deliver  the  gold  to  the  Falls  City 
Bank ;  with  this  he  buys  a  bank  account  of  $50,000— i.  e., 
he  "  deposits  "  the  amount,  and  receives  credit  to  like  amount 
"  on  the  books  of  the  bank." 

He  also  takes  all  moneys  received  by  him  in  the  course 
of  his  business  to  the  Falls  City  Bank  and  exchanges  them 

for  bank  credit.    Now,  when  grain  is  purchased 
2.  Exchanges    „ 
"bank  from  the  farmers  around,  or   from   the  local 

credit"  for  dealer,  or  when  wages  are  paid  or  machinery 
money.  °  . 

and    supplies    are    bought,    or   transportation 

charges  are  to  be  settled,  Brown  signs  a  check  for  the 
amount  involved.  He  draws  against  Falls  City  or  New 
York,  as  may  be  to  his  greater  advantage.  For  local  pay- 
ments he  makes  out  a  local  check ;  if  an  Eastern  account  is 
to  be  settled,  he  checks  against  New  York.  It  costs  him 
nothing  to  pay  in  New  York  what  he  owes  there,  whereas 
he  would  have  to  pay  "  exchange  " — i.  e.,  cost  of  collection 
—if  he  sent  a  Falls  City  draft. 


THE  COMMERCIAL  BANK  243 

But  the  bank  renders  another  service.     Nearly  all  pay- 
ments made  to  the  miller  for  goods  sold  are  in  the  form  of 
credit.     "  Cash  "  sales  are  for  checks  and  drafts 
Customers  ^o    of  customers ;  sales  on  "  time  "  are  exchanges 
convert  of  goods  for  notes  or  credit  accounts — credit 

"business  •.  ,.""  ,.  •, 

credit"  into  obligations  of  purchasers  to  pay  money  at  a 
future  time.  None  of  these  may  be  used 
to  advantage  by  Brown  as  "  current  funds " ; 
neither  can  he  present  them  for  payment  at  the  time  and 
place  specified ;  nor  can  collections  be  made  to  advantage 
by  Brown  personally.  The  places  are  widely  scattered ;  it 
is  important  also  that  he  give  his  time  to  other  matters  of 
business  than  the  collection  of  checks  and  drafts  and  credit 
obligations.  lie  therefore  writes  his  name  across  the  backs 
of  checks  and  drafts  (indorses  them)  and  turns  them  over 
to  the  bank.  The  bank  not  only  assumes  to  attend  to  their 
presentation  and  collection,  but  it  credits  Brown  at  once 
in  full  with  the  amount  turned  over.  The  miller  has  a 
pass-book — i.  e.,  a  book  of  convenient  size  to  be  carried  in 
his  pocket — in  which  the  receiving  clerk  at  the  bank  enters 
the  amount  of  the  checks  and  money  received  "  for  deposit" 
on  the  debit  side.  The  debit  side  of  this  book  represents 
Brown's  credit  at  the  bank — the  amount  that  the  bank  is 
indebted  to  Brown.  Periodically — say  once  a  mouth — this 
pass-book  is  turned  over  to  the  bookkeeper  at  the  bank, 
and  he  enters  on  the  credit  side  the  amount  of  items  paid  by 
the  bank  on  Brown's  order.  The  bookkeeper  then  strikes 
a  balance  and  makes  a  new  entry  of  the  amount  still  owing 
by  the  bank  on  the  debit  side.  Each  afternoon  Brown's 
bookkeeper  makes  a  memorandum  of  all  the  money  and 
checks  received  in  the  course  of  the  day's  business  on  what 
is  known  as  a  "  deposit  slip."  This,  together  with  money, 
checks,  and  pass-book,  he  takes  to  the  bank  and  hands  to 
the  receiving  teller  for  a  new  entry  to  Brown's  account.  In 
exchange  for  the  checks,  drafts,  and  notes  (commercial 
paper)  sent  in  for  "  deposit,"  Brown  receives  "  bank  credit," 


244  FINANCIAL  INSTITUTIONS 

the  bank  relying  upon  Brown's  guarantee  of  indorsement 
on  the  commercial  paper  deposited. 

If,  however,  Brown  does  not  wish  to  assume  the  respon- 
sibility of  indorsing  the  checks  and  drafts  "  for  deposit,"  or 
if  the  bank  does  not  care  to  exchange  its  credit 
dgenTfor  *the  "deposit"  for  these  checks,  drafts,  and  notes 
presentation  on  even  terms ;  or,  again,  if  there  are  notes  and 
Tion  o/  eC  accounts  that  have  been  obtained  by  Brown  in 
"  business  the  course  of  his  business  that  he  does  not  care 
to  exchange  for  "  cash,"  these  may  be  turned 
over  to  the  bank  upon  Brown's  indorsement  "  for  collec- 
tion." The  bank  in  this  case  does  not  at  once  give  Brown 
the  right  to  draw  against  it.  It  does  not  exchange  any- 
thing for  these  credits  so  turned  over.  It  simply  assumes 
to  act  as  Brown's  agent  for  the  purpose  of  presentation  and 
collection,  and  when  collection  is  made  sends  notice  of  the 
fact. 

The  funds  so  held  are  trust  funds,  and  they  remain  "  in 
trust"  with  the  bank  until  order  is  received  from  Brown 
to  place  them  to  his  general  account ;  in  which 
case,  if  the  bank  acts  upon  his  order,  an  ex- 
change is  made  of  "  bank  credit "  of  like 
amount  for  "trust  funds"  held,  and  the  trust  ended.  It 
may  be  to  Brown's  advantage  at  times  to  withdraw  a  cer- 
tain amount  of  money  from  the  bank ;  in  other  words,  to 
exchange  "credit"  to  his  account  for  "money,"  which 
amount  so  withdrawn  may  be  placed  with  the  bank  in  trust 
for  some  special  use  or  business  purpose.  This  will  also 
place  the  bank  in  relation  of  trustee  instead  of  debtor,  and 
the  funds  so  held  will  be  held  for  Brown  and  subject  to 
Brown's  order  and  direction ;  they  can  not  be  used  by  the 
bank  as  assets  of  its  own.  The  bank  may  in  many  other 
ways  serve  the  business  community  as  trustee  in  the  caring 
for  and  handling  of  current  funds. 

Brown's  New  York  bank  account  may  run  low,  and  he 
may  wish  to  increase  it.    For  this  purpose  he  may  draw  out 


THE  COMMERCIAL  BANK  245 

gold  from  the  Falls  City  Bank — i.  e.,  may  demand  payment 
of  his  deposit  in  gold  or  other  "  legal  tender  " — and  trans^ 
fer  this  to  New  York  by  express.  But  if  he  has  iii  mind 
his  own  business  advantage  he  will  not  withdraw  gold 
or  other  forms  of  money.  It  will  cost  him, 

6aJ>    $l    for    S1'000    to    shiP    money    to    New 
York.     He  will  instead  seek  "  exchange."     He 

asks  the  cashier  how  much  he  will  charge  for  a  check  of 
the  bank  on  its  New  York  account.  The  bank  could  never 
ask  more  than  the  cost  of  sending  gold,  for  in  such  case  the 
customer  himself  would  "  draw  "  on  the  bank.  It  will  usu- 
ally ask  less.  The  bank  is  able  to  do  this  because  demands 
are  made  in  New  York  for  money  to  be  sent  to  the  West. 
If  checks  are  drawn  for  remittance  to  the  West,  then,  on  set- 
tlement between  the  various  banks,  only  so  much  money 
will  have  to  be  sent  from  one  to  the  other  as  represents  the 
balance  due.  The  Falls  City  Bank  may  have  on  its  own 
counter  $10,000  of  "  exchange  "  on  New  York,  or  may  know 
where  it  can  obtain  that  amount  at  par.  If  Brown  wishes 
to  send  $15,000  to  New  York,  and  the  bank  has,  at  par, 
$10,000  of  New  York  exchange,  at  $1  per  $1,000,  it  will 
cost  only  $5  to  send  the  balance.  The  bank  could  there- 
fore sell  $15,000  of  exchange  to  Brown  at  $6  and  make  $1 
profit  on  the  transaction,  while  Brown  would  be  $9  better 
off  than  if  he  had  shipped  the  money.  He  would  prefer 
to  pay  the  $6  rather  than  spend  the  time  necessary  to  find 
exchange  elsewhere,  even  though  he  might  save  50  cents  or 
$1  by  so  doing.  The  sale  is  therefore  made.  Brown  makes 
out  his  check  against  the  Falls  City  Bank  "  on  account  of 
New  York  exchange  "  for  $15,000,  and  in  exchange  therefor 
becomes  the  owner  of  a  $15,000  cashier's  check,  or  draft, 
of  the  Falls  City  Bank  on  its  New  York  "  reserve  agent." 

In  the  course  of  his  business  Brown  may  have  contracts 
for  the  delivery  of  grain  in  Liverpool.  As  a  matter  of 
advantage  in  purchase  he  may  wish  to  go  to  the  interior  of 
"Manitoba  for  wheat.  To  purchase  there,  it  may  be  to  his 


246  FINANCIAL  INSTITUTIONS 

interest  to  have  money  instead  of  bank  credit.  He  with- 
draws from  the  bank  at  Falls  City  $5,000  in  paper  money — 
7  Buys  and  ne  does  no^  care  ^°  ^e  encumbered  with  the 
sells  foreign  weight  or  run  the  extra  risk  of  carrying  gold. 
He  finds,  however,  that  the  farmers  are  not 
acquainted  with  this  sort  of  "  paper,"  and  do  not  care  to 
take  it  in  exch.ingc  for  wheat.  He  still  does  not  find  it 
convenient  to  carry  the  necessary  amount  of  coin,  and  there- 
fore goes  to  a  Canadian  bank  for  the  purpose  of  exchanging 
American  "  bills "  for  Canadian  '•  paper  money,"  a  form 
of  credit  that  the  fanners  have  confidence  in,  and  are  will- 
ing to  accept  as  a  par  value  with  gold.  But  the  Canadian 
bank  will  not  trade  without  profit.  It  offers  to  buy  Amer- 
ican bills  at  98  cents.  ILL  exchange  for  $5,000  of  American 
money,  therefore,  Brown  receives  $4,900  in  Canadian  bills, 
which  he  takes  out  into  the  Manitoba  fields  and  exchanges 
for  wheat.  He  has  paid  $100  exchange  on  Canadian  money, 
but  has  had  a  service  rendered  him  by  the  Canadian  bank 
that  is  worth  much  more  than  the  price  paid. 

On  his  way  homeward  he  stops  at  Deadwood,  where  he 
finds  a  merchant  who  wishes  to  buy  flour.  The  trader's 
8.  Ads  as  business  is  to  furnish  supplies  to  mining-camps. 
He  li£o  littlo  money,  but  possesses  a  stock  of 
bullion  which  he  has  received  in  the  course  of 
trade.  Brown  offers  to  sell  flour  F.  O.  B.  at  the  market 
price  at  Falls  City,  and  to  receive  in  payment  bullion  at  the 
market  rate  in  New  York.  The  bullion  is  consigned  to  his 
New  York  bank,  and  on  its  arrival  Brown  is  given  credit 
on  his  account  at  the  market  price  of  silver,  less  commis- 
sion. Returning  to  Falls  City,  he  finds  awaiting  him  there 
notification  of  the  credit  given,  and  he  thereupon  places  on 
board  the  cars,  billed  for  Deadwood,  the  amount  of  flour 
contracted  for.  In  this  way  the  sale  is  made  to  the  Dead- 
wood  merchant  as  readily  and  conveniently  as  if  he  had 
possessed  gold  or  paper  money  instead  of  bullion  of  uncer- 
tain quality. 


THE   COMMERCIAL  BANK  247 

The  bank  has  served  Brown  and  his  business  by  reliev- 
ing him  of  the  expense  and  risk  of  keeping  current  funds 
9.  Binds  to-  in  the  form  of  money.  It  has  furnished  him 
gether  and  with  a  kind  of  credit  that  will  serve  him  more 
fowmess  rela-  conveniently  for  cash.  It  keeps  his  credit  ac- 
tions.  counts  and  makes  collections,  through  its  agents, 

of  all  checks  received  by  him  in  his  business.  It  acts  as 
his  agent  for  the  collection  of  notes  and  bills.  It  serves  as 
trustee  in  matters  where  he  may  gain  business  advantage 
through  such  service.  It  has  enabled  him  to  procure  money 
with  which  to  deal  in  foreign  lands.  It  has  enabled  him  to 
dispose  of  bullion  and  to  trade  with  those  having  it  as  con- 
veniently as  if  they  had  coin  instead.  All  these  services 
are  of  marked  advantage  not  only  to  Brown,  but  likewise, 
by  similar  arrangement,  to  all  other  business  in  the  com- 
munity. Throughout  the  country,  in  fact  throughout  the 
civilized  world,  these  institutions  have  grown  up,  and  by 
maintaining  their  own  credit  engagements  with  others,  men 
are  able  to  make  exchanges  of  large  value  by  use  of  credit 
instead  of  money.  By  maintaining  its  own  credit  the  com- 
mercial bank  likewise  compels  its  patrons  to  fulfil  their  obli- 
gations ;  by  giving  greater  certainty  to  business  judgment 
and  greater  facility  to  exchange,  it  has  become  a  potent 
factor  in  widening  the  range  of  commercial  industrial  en- 
terprise and  increasing  the  opportunities  for  profit  to  those 
who  have  the  ability  to  avail  themselves  of  industrial  and 
commercial  advantage.  Such,  in  brief,  are  the  principal 
services  rendered  by  the  commercial  bank  to  the  business 
community. 

But  how  does  the  bank  profit  ?  Does  it  charge  its  cli- 
ents for  making  exchanges  of  "  money  "  for  "  bank  credit "  ? 
No.  Does  it  receive  compensation  for  keeping 
deposit  accounts?  No.  Does  it  charge  for 
collecting  checks  on  other  banks  that  are  re- 
ceived in  the  course  of  business  and  turned  in  "for  de- 
posit "  ?  No.  Does  it  charge  for  "  collections  "  ?  In  most 


248  FINANCIAL  INSTITUTIONS 

cases  it  does  not.  More  than  this,  it  ofttimes  pays  its  cus- 
tomers something  for  the  privilege  of  performing  these 
services.  How,  then,  can  the  commercial  bank  afford  to 
employ  a  staff  of  officers  and  clerks,  build  and  maintain 
costly  business  houses  and  strong  vaults,  keep  guards  and 
watchmen,  carry  a  large  stock  of  coin  and  bullion  of  their 
own  with  which  to  meet  outstanding  credit  when  demand 
is  made  for  money,  pay  mailing  expenses  and  transporta- 
tion charges,  and  make  other  outlays  incident  to  services 
rendered  to  the  business  community  ?  It  meets  all  these 
charges  out  of  the  income  of  its  business.  Banks  pay  large 
salaries  to  officers  and  employees,  and  they  also  make  a 
good  profit  in  dividends  to  their  stockholders. 

The  bank  obtains  a  small  proportion  of  its  income  from 
sales  of  exchange,  from  transactions  in  coin  and  bullion  and 

other  incidental  services,  but  the  principal  in- 
Profits  arise  ,-.  •>.  ,    ,,      ,       ,        ,.       c 

out  of  ex-        come,  the  income  upon  which  the  bank  rehes  ior 

change  of  its  success,  arises  from  the  fact  that  it  deals  in 
credit "  for  credit,  buys  and  sells  credit.  For  the  pur- 
"timecred-  poses  of  the.  banker  there  are  two  kinds  of 
credit:  1.  Demand  credit — that  which  is  due 
at  such  time  as  it  may  be  presented  for  payment,  and  which 
bears  no  interest.  2.  Time  credit — credit  that  bears  interest 
(interest  being  proportionate  to  the  amount  of  money  prom- 
ised, the  length  of  time  that  payment  is  delayed,  and  the 
rate  agreed  on).  The  chief  function  of  the  bank  is  that  of 
furnishing  to  business  men  a  kind  of  funds  that  will  pass 
current,  such  credit  as  will  be  received  in  exchange  in  lieu 
of  money — that  is,  as  "  cash."  The  business  community 
needs  current  funds — currency.  Under  more  antiquated 
systems  of  business,  money  served  the  need  for  currency  in 
exchange.  The  bank  offers  a  form  of  currency  that  will 
serve  them  better  than  money.  It  offers  bank  credit — its 
own  promise  to  pay  money  on  demand. 

To  make  its  promises  pass  current,  however,  it  is  neces- 
sary to  keep  enough  money  on  hand  to  assure  the  public 


THE  COMMERCIAL  BANK  249 

that  it  can  meet  all  demands  outstanding.  If  this  is  done, 
if  the  bank  so  conducts  itself  that  the  business  community 
has  confidence  in  it,  if,  in  the  judgment  of  "  de- 
positors" and  other  members  of  the  commu- 
nity, it  will  at  all  times  be  able  and  willing  to 
meet  its  promises,  then  the  superior  advantages  of  using 
bank  credit  instead  of  money  will  cause  the  community  to 
do  nearly  all  its  business  with  the  demand  promises  of  the 
bank.  If  the  business  public  know  that  they  can  always 
get  gold  in  exchange  for  "  bank  credit,"  then  the  obligation 
of  the  bank  will  be  considered  "  as  good  as  gold,"  the  value 
of  the  credit  promises  will  be  equal  to  the  value  of  the  thing 
promised.  The  bank,  therefore,  must  keep  such  a  stock  of 
coin  (or  legal-tender  money)  in  its  vaults  as  will  enable  it 
at  all  times  to  satisfy  the  public  that  it  is  ready  to  meet 
its  promises.  The  resources  that  enable  the  bank  at  all 
times  to  retain  the  money  necessary  to  maintain  its  "credit" 
are  usually  contributed  by  its  stockholders  at  the  time  of 
its  organization. 

So  long  as  there  is  no  doubt  of  the  integrity  and  the 
ability  of  the  commercial  bank  to  pay,  it  will  require  only 
a  relatively  small  amount  of  money  to  meet 
Reserve  demands.     In  the  case  of  Brown's  business,  his 

bank  account  may  range  from  $5,000  to  $100,- 
000.  Here  is  a  widely  fluctuating  credit,  to  be  sure,  and  if 
the  bank  had  to  keep  $95,000  in  its  vaults  to  insure  its 
ability  to  meet  his  checks  it  could  profit  nothing  from  serv- 
ing him.  But  Brown  is  not  its  only  customer.  The  bank 
has  several  hundred  others.  When  Brown  buys  his  grain 
he  delivers  checks  to  a  hundred  different  farmers  and  grain- 
dealers  that  are  also  customers  of  the  bank.  Brown's 
account  is  simply  transferred  to  others  on  the  books  of 
the  bank. 

A  little  gold,  or  silver,  or  paper  money  will  be  drawn 
out  daily  to  meet  the  demands  of  trade — to  make  change, 
perhaps,  or  to  do  business  out  in  the  country,  where  the 


250  FINANCIAL  INSTITUTIONS 

people  do  not  know  enough  about  the  financial  standing  of 
business  men  to  be  willing  to  accept  checks — but  in  the 
Ordinary  daily  course  of  trade  about  as  much  money  is 
demands  for  collected  by  merchants  and  bank  customers 
money.  from  "outsiders"  as  is  drawn  out.  This  is 

brought  to  the  bank  and  exchanged  again  for  bank  credit. 
The  amount  of  coin  actually  needed,  when  public  confidence 
is  undisturbed,  amounts  to  but  a  fraction  of  1  per  cent 
of  the  credit  currency  of  the  bank  outstanding.  In  times 
of  financial  disturbance,  when  public  faith  is  shaken,  it  has 
been  found  by  experience  that  if  a  bank  continues  to 
meet  its  obligations  as  fast  as  payment  is  asked,  confidence 
in  its  ability  to  pay  all  demands  will  be  restored  before 
30  per  cent  of  its  outstanding  credit  has  been  redeemed. 
Under  all  circumstances,  therefore,  it  would  not  be  necessary 
to  carry  in  money  more  than  25  or  30  per  cent  of  its  de- 
posits. 

With  $50,000  money  capital  invested  by  the  stockhold- 
ers, the  bank  will  be  able  to  sell  from  $150,000  to  $200,000 
The  bank's  °^  *ts  own  creclit  accounts,  and  will  at  all  times 
salable  be  able  to  deliver  cash  on  demand.  This  is  a 

smaller  percentage  of  "credit"  than  is  usually 
sold  by  the  banks  as  current  funds  "  deposit."  The  Federal 
law  requires  a  15  per  cent  reserve  for  country  banks  and 
25  per  cent  for  city  (reserve)  banks;  but  it  allows  9  per 
cent  of  the  15  per  cent  required  of  the  country  banks  to  be 
deposited  in  the  city  reserve  banks  and  to  be  counted  as  a 
part  of  the  reserves  of  both.  With  a  $50,000  capital  held 
in  its  reserve  a  bank  could  purchase  by  use  of  its  own  credit 
—make  investments— to  the  same  extent  that  it  could,  with- 
out credit,  if  it  had  $200,000  or  more  of  gold  in  its  vaults. 

What  will  the  bank  do  with  this  $200,000  of  disposable 
credit  ?  The  stockholders  have  invested  $50,000  of  money 
in  the  bank.  The  bank  has  $200,000  of  disposable  credit 
for  investment  in  other  things.  It  is  in  the  disposition  of 
its  credit  funds  that  it  builds  up  its  clientage,  renders  the 


THE  COMMERCIAL  BANK  251 

highest  service  to  the  community,  finds   its  own  greatest 
protection,  and  makes  the  greater  part  of  its  income.     Let 

,  us  say  that  Brown  sells  on  the  average  $50,000 
Profits  based  ./       ,.       M1  . 

on  invest-        worth  01  mill  product  per  month.     Some  of 

ment  of  this  is  sold  in  Chicago,  the  remainder  in  New 

York  and  Liverpool.  He  deals  with  first- 
class  wholesale  houses.  But  it  takes  time  to  deliver  goods 
after  a  sale  is  made ;  then,  too,  his  business  arrangement 
with  his  customers  is  that  bills  shall  be  post-dated — that  is, 
if  a  sale  is  made  on  January  20,  ten  days,  perhaps,  may  be 
allowed  after  delivery  and  the  bill  will  be  post-dated  May  1. 
This  is  the  date  upon  which  it  will  be  due  and  payable.  It 
is  also  a  rule  of  business  with  him  to  allow  5  per  cent  dis- 
count from  the  price  stated  in  the  bill  for  "  cash  "  on  de- 
livery. When  Brown  has  a  small  stock  of  grain  on  hand 
he  may  be  able  to  meet  all  the  demands  of  his  business  and 
at  the  same  time  carry  such  of  his  customers  as  do  not  avail 
themselves  of  the  5  per  cent  discount.  In  this  case,  the 
miller  may  be  able  to  get  5  per  cent  on  the  "cash"  price 
for  the  ninety  days'  delay.  But  in  the  fall,  when  the  best 
milling  grains  are  coming  into  the  local  market,  Brown  may 
find  it  to  his  advantage  to  buy  a  large  stock ;  otherwise  it 
may  be  shipped  out  of  the  country,  and  later  he  would  have 
to  pay  Chicago  prices  for  his  grain,  besides  freight  charges 
back  again.  Now,  having  made  local  purchases  of  grain, 
he  is  not  in  position  to  "  carry  "  his  customers.  He  there- 
fore goes  to  his  bank  and  enters  into  an  arrangement  whereby 
he  is  to  turn  over  to  the  bank  "  bills  "  against  his  customers 
for  mill  products  sold ;  he  makes  the  bank  his  agent  for 
collection,  and  at  the  same  time  he  arranges  to  borrow  from 
the  bank  such  amounts  as  he  may  need  in  his  business  (not 
to  exceed  90  per  cent  of  the  amount  of  bills  placed  in  their 
hands).  The  amount  borrowed  from  the  bank  is  represented 
by  Brown's  promissory  note  payable  on  or  before  ninety 
days,  with  interest  at  6  per  cent  per  annum  until  paid.  In 
other  words,  the  bank  arranges  to  sell  its  credit  (a  deposit) 


252  FINANCIAL  INSTITUTIONS 

to  Brown  in  exchange  for  his  interest-bearing  obligation  to 
the  bank.  That  is,  Brown  has  exchanged  his  own  promise 
to  pay  at  a  future  time  for  the  bank's  promises  to  pay  at 
once ;  but  Brown  also  stipulates  that  he  will  pay  an  addi- 
tional sum  to  the  bank,  as  interest,  in  consideration  for  the 
length  of  time  that  his  payment  is  deferred.  By  keeping 
a  money  reserve,  the  bank  is  able  to  sell  some  three  or  four 
times  as  much  of  its  "  demand  credit "  (deposits)  for  the 
"  time  credit "  of  its  customers  (commercial  paper)  as  its 
stockholders  had  money  invested  in  the  bank,  and  gets 
an  income  of  interest  on  its  "  loans "  of  credit,  just  as  it 
would  have  done  had  it  "  loaned  "  money  instead.  In  this 
appears  the  answer  to  the  question,  Why  does  the  bank  keep 
Brown's  account  and  collect  his  checks  free  of  charge,  be- 
sides doing  various  other  services  for  him  at  its  own  ex- 
pense ?  Obviously  it  is  because  by  so  doing  it  will  be  able 
to  do  other  business  out  of  which  a  profit  may  be  realized. 
Brown's  first  deposit  may  have  been  created  by  a  sale  of 
money  to  the  bank  in  exchange  for  "  bank  credit."  Again, 
it  might  have  arisen  from  a  transfer  of  the  "  credit "  of 
some  one  else  for  "  bank  credit."  In  either  case  the  bank 
has  gained  a  business  advantage.  If  money  is  obtained, 
this  adds  to  the  reserve ;  if  the  credit  of  others,  then  their 
credit  funds  are  being  reduced  and  new  demands  created 
for  bank  credit.  The  ones  from  whom  the  checks  were 
received  had  bought  "  deposits."  These  are  being  exhausted. 
More  than  that,  Brown  is  constantly  exhausting  his  own 
account.  When  further  funds  are  needed  by  him  the  bank 
will  be  able  to  sell  its  credit  and  make  a  profit  on  the  sale. 

This  raises  another  question,  What  kind  of 
investment  purchases  may  a  bank  make  with  its  credit? 
that  a  bank  Its  business  is  organized  to  serve  a  class  of 
makea^ly  Pe°ple  engaged  in  trade  and  production.  With 
them  it  must  deal  and  out  of  this  service  it 
must  obtain  its  profits.  But  while  the  bank  serves  the  com- 
munity, it  must  at  the  same  time  serve  itself.  For  the  bank 


THE  COMMERCIAL  BANK  253 

there  are  only  three  kinds  of  property  in  which  its  credit 
may  be  invested  with  safety  and  profit  while  serving  the 
industrial  community :  1.  It  may  sell  its  credit  (deposits) 
for  money.  That  is,  if  a  merchant  or  manufacturer  has 
taken  in  money  that  he  may  not  find  convenient  for  use  in 
his  business,  he  deposits  it — takes  it  to  the  bank  and  sells  it 
for  "bank  credit,"  which  he  finds  more  convenient.  The 
bank's  interest  in  this  exchange  lies  in  its  ability  not  only 
to  give  bank  credit  for  the  money  received,  thereby  main- 
taining a  constant  flow  of  coin,  but  by  thus  strengthening 
its  money  reserve  to  sell  some  two,  three,  or  four  times  as 
much  of  credit  on  the  sale  of  which  it  may  make  a  profit. 
2.  It  may  sell  its  credit  for  such  credit  "  securities "  and 
credit  rights  as  it  may  deem  necessary  to  strengthen  its  re- 
serve, and  relieve  it  from  the  necessity  of  carrying  a  larger 
sum  of  money.  These  investments  are  usually  in  some 
form  of  low- rate  interest-bearing  obligations.  They  may 
be  in  the  form  of  Government  bonds  or  securities  that 
may  be  realized  on  at  any  time  in  the  open  market  without 
loss  of  principal  invested,  and  at  the  same  time  bring  in  a 
small  current  income.  They  are  usually  deposits  in  other 
banks  (as  with  reserve  agents),  or  in  the  form  of  "  call  loans 
on  collaterals" — investments  that  may  be  realized  on  at 
once,  investments  that  usually  bear  a  low  rate  of  interest, 
but  which  grow  out  of  commercial  transactions.  3.  It 
may  sell  its  credit  for  commercial  paper — the  short-time  in- 
terest-hearing or  discountable  credits  that  arise  in  the  course 
of  the  business  of  its  customers.  The  manufacturers  and 
merchants  of  a  community  are  constantly  selling  goods  "  on 
time."  They,  however,  sell  at  such  a  margin  of  profit  that, 
in  case  funds  are  needed  in  their  own  business,  they  may 
dispose  of  the  bills  at  a  discount,  convert  them  into  current 
funds,  and  purchase  their  stock  for  manufacture  and  sale 
rather  than  hold  the  accounts  for  final  payment  with  inter- 
est. Their  business  is  that  of  production  and  sale  of  goods. 
Credit  to  them  is  only  one  of  the  means  employed  in  the 


254  FINANCIAL  INSTITUTIONS 

equipment  of  their  plant  for  larger  profits.  Credit  is  a  con- 
venient means  of  exchange,  and  it  is  out  of  the  exchange 
that  the  profit  is  to  come,  and  not  from  the  income  in  the 
form  of  interest  on  deferred  payments.  The  bank,  on  the 
other  hand,  is  organized  for  the  purpose  of  making  a  profit 
on  the  purchase  and  sale  of  credit ;  but  the  only  kind  of 
high-rate  interest- bearing  credit  that  it  may  safely  handle 
and  at  all  times  maintain  its  own  stock  unimpaired  are 
the  short-time  obligations  of  its  customers.  The  observ- 
ance of  this  principle  is  a  condition  necessary  to  success. 
This  is  imperative,  on  account  of  the  opportunity  which 
is  thus  afforded  the  bank  to  press  for  payment  claims 
which  may  become  doubtful  through  the  shifting  fortunes 
of  merchants.  It  is  also  to  its  advantage  to  maintain  a 
constant  flow  of  payments  from  its  commercial  credit  as- 
sets due  as  a  means  of  protecting  its  money  reserve  in 
case  this  is  at  any  time  threatened  by  those  who  hold 
deposit  accounts. 

According  to  the  report  of  the  Secretary  of  the  Treas- 
ury for  1899,  the  amount  of  capital  stock  paid  in  by  the 
3,595  national  banks  (September  7)  was  $605,772,970.  The 
amount  of  money  reserve  actually  held  at  that  time  was 
$487,524,937.  But  besides  the  capital  stock  paid  in  there 
were  $248,449,235  of  surplus  and  $102,066,430  undivided 
profits— a  total  capital  fund  of  $956,288,635.  It  appears, 
therefore,  that  an  average  of  only  51  per  cent  of  the  capital 
funds  were  actually  held  in  money  reserves,  while  against 
this  money  reserve  there  were  outstanding  $2,450,725,598  of 
individual  deposits,  and  about  $1,000,000,000  of  deposits  in 
other  banks,  $414,000,000  of  the  latter  being  with  author- 
ized reserve  agents.  There  were  besides  some  $200,000,000 
of  national  bank-notes  outstanding.  Assuming  that  $400,- 
000,000  of  the  deposits  in  other  banks  were  drawing  inter- 
est, the  credit  sold  by  those  banks  from  which  an  income 
was  derived  was  over  $3,000,000,000,  or  about  six  and 
one-half  times  the  amount  of  money  reserve  actually  held. 


THE  COMMERCIAL  BANK  255 

The  income-producing  investments  made  in  exchange  for 
their  own  credit  (deposits  and  notes)  were  as  follows: 

Commercial  paper 12,496,751,251 

Deposits  in  other  banks  on  interest  (estimated). .        400,000,000 
United  States  bonds  to  secure  circulation 229,639,610 

Total $3,126,390,861 

If  we  may  assume  that  the  commercial  paper  averaged  5 
per  cent,  United  States  bonds  3  per  cent,  and  interest  on 
deposits  id  other  banks  2  per  cent,  then  the  total  annual  in- 
come on  these  investments  would  be : 

Commercial  paper $124,837,562 

Interest  on  bonds 6,884,188 

Deposits  in  banks  on  interest 8,000,000 

Total $139,721,750 

As  stated  before,  the  bank's  income  is  not  confined  entirely 
to  sales  of  its  own  credit.  Besides  being  an  investor,  the 
banker  is  a  merchant  and  broker— dealing  in  bullion,  coin, 
bills  of  exchange,  bonds,  and  securities.  He  is  also  an  agent 
for  the  collection  of  bills  and  notes.  He  may  likewise  be  a 
trustee.  All  of  these  functions,  however,  have  to  do  with 
money  and  credit  in  their  uses  as  capital — with  the  financial 
operations  and  activities  involved  in  the  purchase  and  sale 
of  goods ;  out  of  them  all  comes  the  gross  income  of  the 
bank,  from  which  are  to  be  obtained  its  expenses  and  profit. 


CHAPTER  XIII 
THE  TRUST  COMPANY 

A  WELL-ORGANIZED  system  of  credit  involves  a  great 
many  fiduciary  relations.  It  is  to  give  greater  certainty 
and  facility  to  the  administration  of  these  that  the  trust 
company  is  organized.  To  make  the  more  common  trust 
relations  concrete,  as  well  as  the  more  common  demands  for 
their  administration,  let  us  recall  the  experience  of  a  retired 
hanker.  At  an  advanced  age  he  withdraws  from  cares  and 
responsibilities  of  management ;  he  intends  to  devote  the 
remainder  of  his  life  to  the  comforts  of  home  and  the  care 

The  sen-ice  °^  n^s  own  Pr°Perties  an^  investments.  He  has 
of  the  trust  not  been  long  in  retirement,  however,  when  an 
old  friend  asks  to  be  allowed  to  insert  his 
name  in  his  will  as  executor.  He  consents.  A  few  months 
elapse  when  the  probate  judge  of  his  district  approaches 
him.  An  estate  has  been  in  his  court  for  several  years ; 
the  administrator,  a  son  of  the  deceased,  has  not  pushed  the 
settlement  as  fast  as  his  position  demanded  ;  the  other  heirs 
complain  not  only  of  delay  and  waste,  but  also  that  the  ad- 
ministrator has  employed  a  portion  of  the  assets  for  his  own 
purposes ;  on  being  cited  to  appear  and  render  an  account 
of  his  trust,  he  disclaims  misappropriation  of  funds,  but 
avers  that  his  own  business  requires  such  a  portion  of  his 
time  that  he  can  not  give  proper  attention  to  the  estate. 
The  judge  urges  the  banker's  acceptance  of  appointment 
as  administrator  to  wind  up  the  estate  as  rapidly  as  the 
interests  of  all  parties  will  permit.  Presently  another  trust 


THE  TRUST  COMPANY  257 

is  thrust  upon  him  in  such  a  manner  that  he  can  not  refuse 
it.  A  neighbor  has  died,  leaving  an  infant  daughter.  By 
will  he  had  appointed  the  banker  guardian  of  his  child  and 
trustee  of  his  estate  for  her  benefit.  Decedent  held  in- 
terest in  a  number  of  industrial  concerns ;  these  must  be 
sold  and  settled  and  the  proceeds  invested  in  such  a  way 
that  safe  and  sure  income  will  be  realized  for  the  education 
and  support  of  the  child.  It  will  be  years  before  his  ward 
will  come  to  such  an  age  that  she  will  be  competent  to  form 
business  judgments  of  her  own.  In  the  meantime,  if  he 
accepts  the  trust,  he  will  be  held  to  account  for  the  proper 
care  of  the  estate  as  well  as  care  of  the  child. 

One  advantage  is  found  in  the  administration  of  these 
trusts :  they  all  call  for  the  exercise  of  the  same  kind  of 
conservative  judgment,  and  they  fit  well  into  the  banker's 
own  business — investment ;  he  now  finds  himself  quite  as 
busy  with  his  new  duties  as  he  had  been  before  his  retire- 
ment ;  in  fact,  so  fully  employed  is  he  in  looking  after  the 
demands  of  trusts  imposed  that  his  occupation  is  growing 
irksome.  Such  demands,  however,  increase.  The  failure 
of  a  large  private  bank  brings  a  further  request  for  his  serv. 
ices.  The  many  creditors,  as  well  as  the  court  having  the 
Tfte  econo-  estate  in  charge,  urge  his  acceptance  of  appoint- 
mles  of  the  ment  as  receiver.  They  point  out  his  special 
ir™icom~  fitness;  his  acquaintance  with  the  men  and 
business  firms  involved ;  his  knowledge  of  the 
value  of  properties  and  securities  held.  An  experience  such 
as  his  seems  indispensable  to  an  equitable  settlement.  The 
parties  concerned  propose  to  allow  him  to  employ  such 
clerical  service  as  he  may  wish,  if  he  will  but  exercise  the 
business  judgment  necessary  to  the  proper  adjustment  of 
their  interests.  He  accepts  this  trust  also,  but,  in  accepting, 
it  becomes  necessary  for  him  to  open  a  down-town  office 
where  he  can  be  in  regular  attendance  during  a  few  hours 
each  day  and  give  attention  and  direction  to  affairs.  Though 
clerical  service  is  competent  to  manage  the  details,  an  ex- 

18 


258  FINANCIAL  INSTITUTIONS 

perienced  and  capable  financier  must  pass  judgment  upon 
all  matters  involving  discretion. 

It  is  out  of  just  such  situations  as  this,  such  increasing 
demands  for  the  competent  management  of  trusts,  that  the 
first  trust  companies  arose.  The  trust  company  is  primarily 
an  American  financial  institution.  It  was  in  this  country 
that  it  had  its  origin.  Ours  was  a  new  society  and  one  in 
which  business  activity  was  a  very  prominent  feature.  In 
America  there  were  comparatively  few  men  of  wealth  and 
ability  who  belonged  to  what  might  be  called  an  intelligent, 
thrifty,  leisure  class.  But  in  Europe  a  large  proportion  of 
„  .  .  ...  estates  were  held,  and  men  found  among  their 
trust  com-  fellows  those  who  had  the  time,  intelligence, 
pany.  an(j  fjnancjal  standing  necessary  for  the  safe 

and  successful  managing  of  trusts.  In  America  the  con- 
servative, well-established,  wealthy  class — the  class  whose 
time  and  wealth  were  not  involved  in  the  turmoils  of  trade 
and  the  risks  of  business  venture — was  so  far  wanting  that 
some  specially  created  agency  to  perform  these  services  be- 
came necessary  to  the  establishment  and  maintenance  of 
trust  relations.  But  the  necessity  that  gave  birth  to  the 
invention  provided  us  with  a  very  superior  instrument — a 
financial  institution  as  far  in  advance  of  the  old-tirne  per- 
sonal trustee  as  the  modern  machine  is  ahead  of  hand  labor. 

Quoting  from  the  Eevised  Statutes  of  New  York,  the 

term  trust  company  signifies  "  any  corporation  formed  for 

the  purpose  of  taking,  accepting,  and  executing 

organization    sucn  trusts  as  may  be  lawfully  committed  to  it, 

—Legal  steps  and  acting  as  trustee  in  the  cases  provided  by 

necessary .          ,        „      m        .  ,         .  .   " 

law."     To  give  a  more  comprehensive  notion 

of  the  constitution  of  the  trust  company  and  of  the  care 
exercised  in  its  formation,  the  manner  of  organization  in 
that  State  may  be  described :  "  Thirteen  or  more  persons," 
says  the  statute,  "  may  form  a  corporation  to  be  known  as 
a  trust  company.  Such  persons  shall,  under  their  hands  ana 
Beals,  execute  and  acknowledge  an  organization  certificate  in 


THE  TRUST  COMPANY  259 

duplicate,  which  shall  specifically  state:  (1)  the  name  by 
which  the  corporation  shall  be  known  ;  (2)  the  place  where 
its  business  is  to  be  transacted ;  (3)  the  amount  of  its  cap- 
j  j,^  ital  stock  and  the  number  of  shares  into  which 

organization  the  same  is  to  be  divided — at  least  $100,000 
certificate.  ig  require(j  for  cities  containing  less  than  25,000 
inhabitants,  $150,000  for  cities  containing  over  25,000  to 
100,000  inhabitants,  $200,000  for  cities  containing  from 
100,000  to  250,000  inhabitants,  and  $500,000  for  cities  con- 
taining more  than  250,000  inhabitants ;  (4)  the  name,  resi- 
dence, and  business  address  of  each  member  of  the  corpo- 
ration;  (5)  the  term  of  its  existence  not  exceeding  fifty 
years ;  (6)  the  declaration  that  each  member  of  the  corpo- 
ration will  accept  the  responsibilities  and  faithfully  dis- 
charge the  duties  of  a  director  therein  if  elected  to  act  as 
such." 

After  the  acknowledgment  of  this  organization  cer- 
tificate, notice  of  intention  to  organize  such  a  trust  company 
2  Notice  of  mus*;  ^je  published  at  least  once  each  week  for  four 
intention  to  consecutive  weeks  in  a  newspaper  (to  be  designa- 
organize.  ted  ^  tne  superintendent  of  banks)  published  in 
the  city  or  town  where  the  proposed  company  is  to  be  located. 
"  Such  notice  is  required  to  set  forth  the  names  of  the  pro- 
posed corporators,  the  name  of  the  proposed  corporation, 
and  the  location  of  the  same,  as  set  forth  in  the  organization 
certificate.  If  there  is  any  trust  company  or  trust  com- 
panies organized  and  doing  business  in  such  city,  a  copy  of 
such  notice  shall  also  be  sent  to  each  trust  company  so  or- 
ganized and  doing  business  at  least  fifteen  days  before  the 
filing  of  the  organization  certificate." 

Within  sixty  days  after  the  acknowledgment, 
office* of  9S™  one  °f  tne  duplicate  copies  of  the  certificate  of 
perintendent  organization  must  be  filed  in  the  office  of  the 
County  Clerk  of  the  county  wherein  the  trust 
company  proposes  to  locate  and  do  business.  The  other 
must  be  sent  to  the  office  of  the  Superintendent  of  Banks 


260  FINANCIAL  INSTITUTIONS 

of  the  State,  together  with  evidence   of  publication  and 

service  of  notice  before  described. 

"  If  such  certificate  is  in  due  form  and  duly  executed 

according  to  law,  and  is  accompanied  by  evidence  satisfac- 
tory to  the  superintendent  of  the  proper  publi- 

tlon  U  cation  and  service  in  good  faith  of  such  notice, 

he  shall  forthwith   indorse  the  same  over  his 

official  signature,  'Filed    for  examination,'  with  the  date 

of  such  indorsement." 

"  When  the  certificate  shall  have  been  filed,  the  super- 
intendent shall  ascertain  from  the  beat  sources  of  informa- 

5  Examina-   ^arl  a^  ^**  command  (1)  whether  the  general 
iion  as  to        fitness  for  the  discharge  of  the  duties  apper- 
taining to  such  a  trust  of  the  persons  named  in 

the  certificate  is  such  as  to  command  the  confidence  of  the 
community  in  which  such  trust  company  is  proposed  to  be 
located,  and  (2)  whether  the  public  convenience  and  ad- 
vantage would  be  promoted  by  such  an  establishment.1" 

Further,  "  The  Superintendent  of  Banks  shall,  before  is- 
suing the  certificate  of  authorization  to  any  corporation,  ex- 

6  \uthori-     aimne  or  cause  an  examination  to  be  made  in 
zation  to  be-    order  to  ascertain  whether  the  requisite  capital 

'•  of  such  corporation  has  been  paid  in  cash ;  and 
if  it  appears  from  such  examination  that  such  capital  has 
not  been  fully  paid  in  cash,  the  certificate  of  authorization 
shall  not  be  granted  and  no  such  corporation  shall  com- 
mence business  until  such  certificate  of  authorization  has 
been  granted.  If  so  satisfied,  he  shall,  within  sixty  days 
after  such  certificate  has  been  filed  with  him  for  examina- 
tion, issue  under  his  own  official  seal  the  certificate  of  au- 
thorization required  ;  .  .  .  .  which  certificate  so  issued  by 
him  shall  authorize  the  persons  named  therein  to  become  a 
trust  company  as  designated  in  the  organization  certifi- 
cate." 

When  the  certificate  of  authorization  is  given  by  the 
Superintendent  of    Banks,  the   persons  named  and  their 


THE  TRUST  COMPANY  261 

successors  become  a  corporation,  and  in  addition  to  the  gen- 
eral powers  granted  to  corporations  within  the  State,  have 
7  Trust  *ne  f°llowing  powers :  (1)  To  be  appointed  and 
powers  to  accept  appointment  of  executor  or  of  trustee 

under  the  last  will  and  testament,  for  adminis- 
trator with  or  without  will,  in  case  of  the  estate  of  any  de- 
ceased person,  and  to  be  appointed  and  to  act  as  trustee  of 
the  estates  of  lunatics,  idiots,  persons  of  unsound  mind,  and 
habitual  drunkards.  (2)  To  take  and  execute  any  and  all 
such  trusts  and  powers  of  whatsoever  nature  or  description 
as  may  be  conferred  upon  or  entrusted  or  committed  to  it  by 
any  person  or  persons,  or  any  body,  political  corporation,  or 
other  authority,  by  grant,  assignment,  transfer,  devise,  be- 
quest, or  otherwise,  or  which  may  be  entrusted  to  it  or  trans- 
ferred to  it  or  vested  in  it  by  order  of  any  court  of  record 
or  any  surrogate,  and  to  receive  and  take  and  hold  any 
property  or  estate,  real  or  personal,  which  may  be  the  sub- 
ject of  any  such  trust.  (3)  To  take,  accept,  and  execute 
any  and  all  such  legal  trusts,  duties,  and  powers  in  record, 
and  the  holding,  management,  and  disposition  of  any  estate, 
real  or  personal,  and  the  rents  and  profits  thereof,  for  the 
sale  thereof,  as  may  be  granted  or  confided  to  it  by  any 
court  of  record,  or  by  any  person,  corporation,  municipality, 
or  other  authority,  and  it  shall  be  accountable  to  all  parties 
and  interests  for  the  faithful  discharge  of  every  such  trust, 
duty,  or  power  which  it  may  so  accept.  (4)  To  act  under 
the  order  of  appointment  of  any  court  of  record  as  guard- 
ian, receiver,  or  trustee  of  the  estate  of  any  minor,  the 
annual  income  from  which  shall  not  be  less  than  $100, 
and  as  the  depository  of  any  moneys  paid  into  court 
whether  for  the  benefit  of  any  such  minor  or  other  per- 
son, corporation,  or  party.  (5)  To  accept  trusts  from 
and  execute  trusts  for  married  women  in  respect  to  their 
separate  properties  and  to  be  their  agent  in  the  manage- 
ment of  such  property,  or  to  transact  any  business  in  rela- 
tion thereto.  (6)  To  receive  deposits  of  trust  moneys, 


262  FINANCIAL  INSTITUTIONS 

securities,  and  other  personal  property  from  any  person 
or  corporation. 

These  we  may  call  the  general  trust  powers  conferred. 
In  addition,  there  are  what  may  be  styled  the  special  trust 
powers,  growing  out  of  modern  methods  of 
corporation  linance,  and  trust  service  demanded 
in  the  organization  and  management  of  large 
business  corporations.  These  are  as  follows  :  1.  The  power 
to  act  as  the  fiscal  or  transfer  agent  of  any  State,  munici- 
pality, body  politic,  or  corporation,  and  in  such  capacity 
receive  and  disburse  money  and  transfer,  register,  and  con- 
sign certificates  of  stock,  bonds,  or  other  indebtedness.  2. 
The  power  to  act  as  trustee  under  any  mortgage  or  bond 
issued  by  any  municipality,  body  politic,  or  corporation; 
and,  3,  accept  and  execute  any  other  municipal  or  corpo- 
rate trust  not  inconsistent  with  the  laws  of  the  State. 

To  give  effect  to  these  trust  powers,  and  enable  the  com- 
pany to  manage  the  funds  and  properties  entrusted  to  it  in 
such  manner  as  to  make  and  secure  and  at  the 
same  t"ne  provide  an  income  to  beneficiaries, 
investment  powers  are  conferred  as  follows : 
(1)  To  loan  money  on  real  and  personal  securities.  (2)  To 
purchase,  invest  in,  and  sell  stock,  bills  of  exchange, 
bonds,  mortgages,  and  other  credits.  (3)  When  moneys  or 
securities  are  borrowed,  or  received  on  deposit  or  for  invest- 
ment, the  bonds  and  obligations  of  the  company  may  be 
given  therefor.  (4)  To  lease,  hold,  purchase,  and  convey 
any  and  all  real  property  necessary  in  the  transaction  of  its 
business,  or  which  the  purposes  of  the  corporation  may 
require,  or  which  it  shall  acquire  in  the  satisfaction  or  per- 
sonal satisfaction  of  debts  due  the  corporation  under  sales, 
judgments,  or  mortgages,  or  in  settlement  or  in  partial  set- 
tlement of  debts  due  the  corporation  by  any  of  its  debtors. 
With  these  authorizations  and  grants  of  powers,  the 
trust  company,  after  equipping  itself  with  officers  and  agents 
for  the  safe  conduct  of  its  affairs,  is  ready  for  business. 


THE  TRUST  COMPANY  263 

The  first  trust  companies  organized  did  not  have  their 
powers  so  broadly  or  distinctly  defined,  nor  did  they  need 
The  rowth  tnem-  Before  the  development  of  modern 
of  business  of  methods  of  corporate  finance,  before  the 
owLr**"  growta  of  the  present  complex  organization  of 
business,  only  the  general  trust  relations  were 
prominent.  Insurance  companies  were  the  first  to  under- 
take the  administration  of  trusts  in  lieu  of  personal  trus- 
tees. Gradually,  however,  as  trust  relations  became  more 
highly  developed  and  more  frequent,  the  business  of  hold- 
ing and  executing  trusts  came  to  be  specialized.  Within 
the  last  twenty-five  years  trust  relations  and  trust  companies 
have  been  multiplied.  The  vast  expansion  of  corporate 
methods  of  business,  the  advantages  offered  by  the  trust 
company  in  the  service  of  business  institutions  for  the 
registration  and  transfer  of  stocks  and  bonds,  the  practise 
of  holding  trust  deeds  and  mortgage  securities  for  bond- 
holders, of  receiving  assignments  of  property  for  the  bene- 
fit of  prospective  corporations  which  are  in  the  hands  of 
promoters,  and  for  the  purposes  of  reorganization  and  for 
the  execution  of  voting  trusts,  besides  the  many  services 
which  they  are  able  to  render  as  funding  agencies,  fiscal 
and  transfer  agents  for  public  as  well  as  private  corpora- 
tions, in  the  underwriting  and  disposition  of  stocks  and 
bonds  and  the  disposition  of  moneys,  the  demand  for  such 
services  has  directed  large  investment  capital  and  the  best 
financial  ability  to  the  trust  company. 

As  investment  agents,  the  trust  company  acts  in  a  double 
capacity.  In  the  first  place,  it  acts  as  trustee  for  its  bene- 
Double  in-  ficiaries ;  in  the  second  place,  it  has  a  large  cash 
vestment  capital  of  its  own.  The  inducement  to  the  in- 
relahons.  vestment  of  money  in  the  stock  of  the  trust 
company — in  making  subscriptions  to  its  capital  stock — is 
apparent.  The  character  of  business  judgment  and  of 
business  enterprise  necessary  to  the  successful  management 
of  trust  estates  is  the  same  as  that  required  for  the  con- 


264  FINANCIAL  INSTITUTIONS 

servative  investment  of  the  funds  of  its  managers.  Capi- 
tal, therefore,  that  is  seeking  first-class  securities  and  invest- 
ments would  be  attracted  to  the  stock  of  such  an  institu- 
tion. To  return  to  the  concrete :  Let  us  suppose  that  A 
had  $500,000  of  investment  funds  of  his  own.  The  same 
considerations  that  would  lead  men  with  capital  to  invest  it 
in  the  stock  of  a  trust  company  would  induce  them  as 
managers  of  the  company  to  receive  deposits  from  those 
who  had  funds  to  invest,  but  who  were  willing  to  take  a 
relatively  small  income  and  be  relieved  of  the  risk  and 
trouble  of  management.  By  offering  3  per  cent  for  time 
deposits  the  trust  company  has  exchanged  its  own  credit 
obligation  for  funds  deposited  ;  by  virtue  of  its  better  fa- 
cilities for  safe  investment,  the  company  is  enabled  so  to 
invest  these  funds  that  they  may  yield  from  4  to  5  per 
cent.  This  on  a  large  line  of  deposit  would  also  give  it  a 
handsome  profit. 


CHAPTER  XIV 
THE  BROKER  AND  THE  BROKERS'  BOARD 

A  BROKER  is  a  special  agent  employed  to  make  purchases 
or  sales  for  another — his  principal.  Mr.  Wanamaker  wishes 
to  borrow  $500,000  for  sixty  days,  with  which  to  make  pay- 
ment on  a  cargo  of  goods  received  from  Paris.  No  one 
person  or  bank  would  at  the  time  have  that  amount  of 
funds  free  for  investment  in  sixty -day  paper;  moreover, 
from  considerations  of  safety,  it  is  the  policy  of  banks  and 
other  note-buyers  not  to  have  a  large  proportion  of  their 
funds  invested  in  the  paper  of  one  person  or  business  firm. 

To  find  purchasers  for  this  amount  of  paper  on 
'broker!6'  favorable  terms  would  require  Mr.  Wanamaker 

to  leave  his  business  house  and  spend  time  else- 
where which  he  might  profitably  use  in  his  office.  Instead 
of  doing  this,  he  goes  to  a  note-broker — a  man  who  makes 
it  his  business  to  find  customers  of  this  kind,  one  who  keeps 
in  touch  with  the  note-buying  constituency.  The  broker 
knows  the  kind  of  paper  that  the  banks  and  other  note- 
buyers  usually  take,  and  about  how  much ;  at  this  time,  in 
fact,  he  may  have  a  long  list  of  buyers'  wants  scheduled  on 
his  books.  For  a  small  commission  he  undertakes  to  sell 
the  notes  for  Mr.  "Wanamaker.  Turning  to  the  orders  of 
buyers  scheduled  on  his  books,  he  first  satisfies  these  by 
setting  apart  enough  to  fill  them.  Let  us  suppose  that  he 
already  has  customers  for  $200,000  of  this  kind  of  paper. 
He  then  takes  down  his  "  'phone,"  and,  by  calling  up  one 
prospective  buyer  after  another,  has  the  whole  remaining 

265 


266  FINANCIAL  INSTITUTIONS 

amount  disposed  of  in  half  an  hour.  His  delivery  clerk 
is  then  sent  out  with  the  notes,  who,  in  exchange,  brings 
back  customers'  checks,  which  are  deposited ;  thereupon  re- 
mittance of  the  amount  of  funds  desired  is  made  to  Mr. 


Wanamaker  for  settlement  with  his  Paris  house.  The 
notes  usually  handled  by  commercial  paper  brokers  for 
large  houses  are  made  in  uniform  amount  of  $5,000  each. 
They  are  drawn  to  the  order  of  the  "  maker,"  and  with- 

LETTER  OF  RELEASE. 


Philadelphia,, 189 

£or  and  in  consideration  of  the  sum  of  one  dollar,  to  us  in  hand  paid,  the  receipt 

whereof  is  hereby  acknowledged, .  ,  — 

agrees  to  release,  and  hereby  does  release^ 

from  all  liability  as  endorsers  on  a  note  of - 


.in  the  year  eighteen  hundred  and  ninety- 


and  the  taid further  agree*  to  hold  the  said  endorsers 

harmless  on  said  note. 

Wttneu:  

out  indorsement  are  what  is  known  as  one-name  paper. 
When  not  executed  to  the  order  of  the  maker  and  a  dealer 


THE  BROKER  AND  THE  BROKERS'  BOARD 


267 


wishes  to  protect  himself,  he  secures  a  release  from  respon- 
sibility on  indorsement.  The  manner  of  conducting  a 
transaction  through  a  "  commercial  paper  house  "  is  illus- 
trated by  the  following  statements  of  account :  The  first 


^/^^>  x*^T      ^  Sy#/'3s/rs'/l'<//y     S^nt- 
ff  f7^ 

£%?7#!^ .      /rSP^>       &S&4 


represents  that  Bodine,  Altemus  &  Co.  on  May  29,  1902, 
bought  of  John  Smith  &  Co.  a  note  executed  by  John 


//, 


'I 

V  ^ 

^^/r^^>^ 


Jones  &  Co.,  bearing  interest  at  4£  per  cent,  due  Septem- 
ber 30,  following;    that  the  note  runs  125  days,  which 


268  FINANCIAL  INSTITUTIONS 

at  4£  per  cent  amounts  in  interest  to  $104.17.  Allowing 
for  discount  and  commission,  the  total  deduction  to  be  made 
from  the  fall  of  the  note  equals  $90.63.  This  leaves  a  net 
cash  payment  of  $4,909.37  on  purchase  of  the  note.  The 
second  statement  is  one  of  sale  by  Bodine,  Altemus  &  Co., 
by  which  it  appears  that  the  terms  were  exactly  the  same 
as  those  of  purchase,  except  that  $12.50  is  added  for  com- 
mission. 

Upon  receipt  of  the  $500,000  in  funds — the  proceeds 
of  the  note  sale — Mr.  Wanamaker  has  another  problem  to 
solve,  viz.,  "  How  is  this  amount  of  money  to  be  transmitted 
to  Paris  "  ?  This  may  be  done  by  drawing  that  amount  of 
gold  out  of  the  bank  in  New  York  where  his  account  is 
kept,  and  sending  it  by  express  to  the  parties  from  whom 
purchases  of  goods  were  made.  This  would  cost  him  $1 
per  thousand  or  $500  for  transportation  charges.  If  $500,- 

000  of  the  bills  of  New  York  merchants  against 
broker*96'       merchants  of  Paris  can  be  found,  he  may  buy 

these  and  then  send  them  to  his  Paris  banking- 
house  for  collection.  By  so  doing  the  cost  of  transporting 
gold  to  Paris  would  be  avoided  ;  at  the  same  time  the  Paris 
merchants  would  avoid  the  cost  of  sending  a  like  amount 
of  gold  back  to  New  York.  The  matter  of  finding  suet 
bills  against  Paris  merchants  is  given  over  to  an  exchange- 
broker.  The  exchange-broker,  who  has  a  constituency  that 
have  foreign  bills  for  sale,  telephones  around  from  place  to 
place,  and  within  a  short  time  has  the  desired  amount. 
For  a  commission  amounting  to  a  small  fraction  of  the  cost 
of  shipping  gold,  $500,000  of  good  trade  bills  are  obtained. 
After  the  goods  have  been  sold,  Mr.  Wanamaker  may 
have  $100,000  that  he  has  no  immediate  use  for  in  his  busi- 
ness, and  he  decides  to  invest  the  amount  in  stocks  and 
bonds.  Looking  over  the  securities  of  companies  on  the 
market,  he  makes  up  his  mind  that  Chicago,  Burlington 
&  Quincy  Consolidated  7  %  of  1903,  @  102,  Chicago  & 
Northwestern  Sinking  Fund  6's  of  1929,  @  115,  and 


THE  BROKER  AND  THE  BROKERS'  BOARD    269 

Central  of  New  Jersey,  common,  @  150,  will  make  good 
investments  if  they  may  be  had  at  the  prices  named.  But 
he  does  not  know  any  one  who  has  any  of  these  for  sale  at 
these  prices.  To  obtain  these  investments  he  leaves  an 
order  with  a  stock-  and  bond -broker.  The  order 

broker™1*'  'l6  to  ^uy  any  °^  tne  8toc^8  or  bonds  on  the 
market  at  the  prices  named.  At  the  time  that 
the  order  is  given  none  of  them  may  be  offered  at  the 
price;  but  within  two  weeks  the  money  market  becomes 
close,  and  some  of  the  holders  of  securities  are  willing  to 
sell  at  such  figures  that  the  order  may  be  executed.  The 
broker  charges  %  of  1  per  cent  for  his  services  on  delivery. 

Again,  Mr.  Wanamaker,  being  interested  in  a  textile 
factory  at  Worcester,  may  wish  to  purchase  a  stock  of  cot- 
ton for  the  year.  He  has  contracts  for  cloth  to  fill,  and 
desiring  to  take  advantage  of  a  present  market  for  mate- 
rials for  manufacture,  he  places  an  order  with  a  cotton- 
broker  for  500  bales  at  5  cents  per  pound.  In  like  man- 
ner, a  person  desiring  wheat  or  corn  will  go  to 
broker  °  ^  a  grain -broker ;  another,  desiring  petroleum,  will 
go  to  an  oil-broker ;  one  wishing  to  lay  in  a 
supply  of  coal  may  deal  with  a  coal-broker,  etc.  Any 
property  or  commodity  that  has  a  central  market  may  be 
the  subject  of  a  broking  business. 

The  business  of  broking  has  given  rise  to  a  peculiar 
form  of  institution  known  as  a  Brokers'  Board.  In  early 
days  the  stock-  and  bond-brokers  did  business  in  much  the 
same  way  that  coal-brokers  or  real-estate-brokers  do  to-day. 
On  receiving  a  consignment  for  sale  they  would  go  out  on 
the  street  to  find  purchasers ;  or,  receiving  buying  orders, 
they  would  go  about  from  place  to  place  to  find  owners  who 
had  stocks  and  bonds  of  the  kind  wanted,  and  which  might 
be  obtained  at  the  prices  offered.  The  result  of  a  morning's 
canvass,  however,  might  give  but  small  return.  Coming  to 
the  coffee-house  for  luncheon,  they  would  meet  other  brokers 
who  also  had  buying  and  selling  orders.  It  was  found  by  ex- 


270  FINANCIAL  INSTITUTIONS 

perience  that  more  business  could  be  transacted  at  luncheon, 
or  during  a  half -hour  meal-time  smoke  with  brokers  than  by 
a  whole  day's  canvass.  The  advantage  of  bringing  together 
the  buying  and  selling  wants  of  a  community 
at  a  meeting  °f  brokers  caused  them  as  by 
common  consent  to  meet  at  a  central  coffee- 
house to  transact  their  business.  But  this  was  oftentimes 
unsatisfactory  on  account  of  the  unreliability  of  some  of  the 
traders.  The  result  was  that,  as  business  increased,  an  asso- 
ciation was  formed  with  rules  governing  it  which  would 
insure  honorable  dealings  among  members,  and  at  the  same 
time  give  to  each  member  the  advantage  of  meeting  the 
leading  brokers  of  the  place. 

The  Philadelphia  Stock  Exchange  had  its  beginning  at 
a  coffee-house.  The  sales  of  Government  bonds  and  of 
Histor  stocks  in  the  newly  organized  companies  after 

of  stock  the  close  of  the  Revolution  was  the  business 
exchanges.  wbic]l  broug]lt  jt  fortk  London  stock-broking 
began  with  the  foundation  of  the  national  debt  under  Wil- 
liam and  Mary.  Large  corporate  trading  companies  had 
been  organized  before  this  time,  but  the  stocks 
delphla  were  not  traded  in  to  such  an  extent  as  to  give 

rise  to  a  regularly  organized  broking  business. 
With  the  flotation  of  the  bonds  issued  for  the  purpose  of 
raising  funds  to  carry  on  the  wars  against  France,  and  the 
2  The  Lon-  aPPea^8  made  to  the  public  for  investment  in 
don  Sfock  these  stocks,  stock- jobbing  became  a  regular  busi- 
Exchange.  ^&&&  jn  London.  This  was  soon  followed  by  the 
flotation  of  shares  in  companies  organized  for  taking  advan- 
tage of  the  new  territory  made  free  for  British  exploitation 
after  the  success  of  the  English  armies  on  the  Continent. 
The  South  Sea  Bubble  was  only  one  of  the  projects  that 
gave  rise  to  the  issues  of  shares  which  flooded  the  London 
market  and  made  the  business  of  broking  one  of  the  most 
important  branches  of  enterprise  established  in  the  eight- 
eenth century.  The  London  brokers  first  found  rendez- 


THE  BROKER  AND  THE  BROKERS'  BOARD    271 

vous  in  the  Royal  Exchange,  a  building  erected  during  the 
reign  of  Elizabeth  as  a  meeting-  place  for  merchants.  In 
1698  these  quarters  were  found  too  small,  and  were  conse- 
quently abandoned.  For  a  number  of  years  brokers  col- 
lected in  a  place  made  famous  by  them,  which  has  since 
been  known  as  "  Change  Alley."  A  coffee-house  opening 
on  this  alley  was  their  favorite  retreat  for  social  and  finan- 
cial chat.  The  New  York  brokers  found  their  first  central 
meeting-place  at  what  has  gone  down  in  history  as  the 
"Tontine  Coffee- House,"  at  the  corner  of  Wall  and  Water 
Streets.  New  York,  like  Philadelphia,  early  became  a 
center  of  financial  interest  and,  with  this,  for  the  business 
of  stock-broking.  Much  conflict  had  grown  out  of  the  va- 
riety of  commissions  charged  in  the  early  transactions  and 
3  The  New  ^ie  irregular  dealings  of  brokers.  The  begin - 
York  Stock  ning  of  the  New  York  Stock  Exchange  dates 
Exchange.  from  a  meeting  of  2-1  brokers  under  a  tree 
which  grew  opposite  No.  60  Wall  Street.  This  agreement 
is  dated  May  17,  1792,  and  is  one  providing  for  uniform 
commissions  among  the  contracting  parties.  The  force  of 
such  an  agreement  was  to  control  the  market,  since  the 
signers  confined  their  trading  operations  to  those  who  would 
conform  to  it.  It  was  not  until  1817,  however,  following 
the  growth  of  corporations  after  the  War  of  1812,  that  a 
formal  organization  was  effected.  As  business  increased, 
with  the  floating  of  bank,  canal,  and  railroad  stocks,  the 
outside  brokers  organized  what  was  known  as  the  "  Open 
Board  of  Brokers."  This  was  absorbed  by  the  New  York 
Stock  Exchange  in  1868,  membership  in  the  latter  being 
increased  to  accommodate  that  of  the  older  organization. 
During  the  civil  war  a  special  class  of  business  grew  out 
of  the  necessity  for  gold  purchases  and  gold  sales  for  for- 
eign trade,  and  for  the  payment  of  the  obligations  of  the 
Government.  The  "Gold  Board,"  as  the  association  of 
brokers  having  charge  of  this  class  of  business  is  called,  was 
incorporated  as  a  part  of  the  Stock  Exchange  in  1879. 


272  FINANCIAL  INSTITUTIONS 

Later  the  New  York  Mining  Stock  Exchange  was  estab- 
lished, to  accommodate  the  business  growing  out  of  the 
speculative  mania  for  mining  shares  in  the  "TO's ;  and  with 
the  discovery  of  Leadville  and  other  Colorado  districts,  a 
second  board,  called  the  American  Mining  Stock  Exchange. 
The  decline  of  the  popularity  of  mining  stocks  forced  these 
bodies  to  look  for  some  other  branch  of  business.  The  fast- 
growing  demands  for  petroleum  gave  them  an  outlet.  In 
1885  the  two  mining  exchanges  consolidated 

srfitfated  w*tn  ^ie  °^  Petr°leum  Exchange  as  the  Con- 
Stock  and  solidated  Stock  and  Petroleum  Exchange.  New 

Petroleum  York  therefore  has  two  large  stock  exchanges 
Exchange.  » 

as  meeting-places   for   brokers    handling   this 

class  of  purchases  and  sales.  Not  all  the  business,  how- 
ever, is  done  on  the  floors  of  these  two  boards;  a  large 
amount  is  transacted  "  on  the  street,"  as  it  is  called — that 
is,  the  brokers  not  having  membership  in  these  organiza- 
tions will  come  together  as  of  old  at  some  customary  place, 
and  on  the  sidewalk  or  in  the  street  they  will  bicker  and 
trade,  thus  making  exchanges  for  their  customers. 

A  stock  exchange  need  not  be  a  corporation.  The  New 
York  Stock  Exchange,  for  example,  is  only  a  voluntary 
Or  anization  association  of  members.  It  must,  however,  be 
of  a  stock  well  organized.  It  must  exercise  complete  con- 
exchange.  troj  oyer  tbose  who  enjoy  itg  privilegeSj  for  jt 

is  out  of  the  regularity  of  transactions  that  its  advantages 
accrue.  In  the  New  York  Stock  Exchange  there  is  a 
membership  of  1,100.  As  the  membership  is  full,  one  may 
obtain  a  seat  only  by  purchasing  it  from  a  member.  One 
can  not  become  a  member,  however,  until  he  has  passed  the 
most  careful  scrutiny  of  the  Membership  Committee  re- 
garding his  credit,  his  financial  responsibility,  his  business 
association,  his  reputation  for  honesty  and  fair  dealing.  In 
addition  to  the  usual  incentive  for  honesty  in  business, 
therefore,  the  stock-broker  has  the  price  of  his  seat  as  well 
as  his  whole  opportunity  for  doing  business  staked  on  ob- 


THE  BROKER  AND  THE  BROKERS'  BOARD    273 

servance  of  business  propriety  and  honorable  conduct.  No 
other  class  of  men  has  the  quality  of  business  honor  so  high- 
ly developed.  For  contracts  involving  millions  of  dollars, 
only  individual  pencil  memoranda  are  made,  and  deliveries 
of  securities  and  remittances  are  conducted  on  these  mem- 
oranda with  the  utmost  confidence  that  contracts  concluded 
by  "finger-talk"  will  be  fulfilled  without  question.  The 
only  possibility  considered  by  members  of  the  board  is  one 
of  mistake,  and  as  a  precaution  against  this,  an  office  clerk 
is  sent  out  at  the  end  of  each  day's  business  to  compare 
notes  with  houses  dealt  with,  upon  comparison  of  which 
errors  made  are  corrected  without  conflict  or  controversy. 

For  illustration  of  plan  of  organization,  the  Philadel- 
phia Stock  Exchange  may  be  used.     At  the  head  of  the 
Philadelphia  Stock  Exchange  is  a  president, 

Organization       .  ,      x  V, 

of  the  Phila-  who  opens  and  closes  the  board  at  the  regu- 

delphia  larly  prescribed  time ;  he  preserves  order,  an- 

Exchange.  <.  .,  ,.  •  ^          t 

nounces  failures  of  members,  gives  notice  of 

contracts  unfulfilled,  and  attends  to  their  execution  under 
the  rules  of  the  board.  The  board  opens  at  10  A.  M.  and 
closes  at  3  p.  M.  Deliveries  must  be  made  before  2.15,  ex- 
cept on  purchases  and  sales  for  cash.  The  board  has  vari- 
ous committees  to  look  after  different  departments  of  busi- 
ness and  to  see  that  its  rules  are  properly  complied  with. 
These  committees  are  as  follows  :  1.  A  Governing  Commit- 
tee, consisting  of  21  members,  one-third  of  whom  retire 
each  year.  This  committee  has  general  supervision  of  the 
affairs  of  the  association,  and  is  the  court  of  final  resort. 
2.  A  Finance  Committee,  consisting  of  5  members,  which  has 
charge  of  the  funds  of  the  exchange  and  the  investment  of 
any  surplus  funds  in  the  treasurer's  hands.  3.  A  Build- 
ing Committee  of  3  members,  which  has  supervision  and 
control  of  the  home  of  the  board — has  charge  of  repairs, 
service,  etc.  4.  A  Committee  on  Admissions,  consisting  of 
5  members,  to  whom  all  applications  for  membership,  for 
transfer,  or  re-admission  of  suspended  members  are  re- 
19 


274:  FINANCIAL  INSTITUTIONS 

ferred.  5.  An  Arbitration  Committee,  consisting  of  7 
members,  whose  duty  it  is  "  to  investigate  and  decide  all 
claims  and  matters  of  difference  between  members  of  the 
exchange  which  may  be  brought  before  it,  arising  from 
transactions  in  bonds,  bullion,  stocks,  or  other  securities,  or 
from  any  transactions  in  money."  This  is  one  of  the  most 
important  committees  in  the  organization  ;  it  serves  as  an 
inner  court,  so  to  speak.  Like  the  courts  established  for 
the  government  of  the  old  incorporated  trading  companies, 
it  so  far  controls  the  conduct  of  members  and  arbitrates 
differences  between  them  that  it  is  seldom  any  matter  of 
controversy  gets  before  the  regular  courts  of  law.  Upon 
their  decisions  are  built  up  rules  and  precedents  which 
constitute  a  code  for  business  transactions,  and  which  by 
practise  and  common  consent  regulate  the  practises  of 
those  outside  of  the  board  and  find  a  final  place  in  the 
written  decisions  of  the  courts  of  record. 

By  reference  to  the  plan  below,  an  idea  may  be  had  of 
the  floor  arrangement  of  a  board.     A  large   part  of  the 

floor  space  is  encumbered  with  nothing  but 
rangementT'  wnat  are  ca"ed  trading-posts.  These,  as  the 
and  office  up-  name  suggests,  are  posts  set  up  on  the  floor 
of'brokers!  around  which  certain  kinds  of  stocks  may  be 

traded  in  ;  as,  for  example,  one  post  may  be  for 
railroad  stocks,  another  for  iron  and  steel  stocks,  another 
for  municipal  bonds,  etc.  (see  posts  numbered  1  to  8  in 
illustration).  One  having  stocks  or  bonds  for  sale  wishes 
to  "offer"  them  on  the  general  market;  to  this  end  he 
will  go  to  the  post  where  such  stocks  are  traded  in  and 
cry  out  his  "  offer  "  ;  or  if  he  wishes  to  purchase  stocks, 
he  may  go  to  another  post  and  shout  out  his  "bid."  It 
is  this  auctioneering  and  bidding  on  the  floor  of  the 
board  around  these  posts,  or,  in  the  case  of  a  produce  ex- 
change, in  the  "  pits,"  that  causes  the  uproar  so  often  re- 
marked upon.  The  board  is  simply  an  auction-room,  in 
which  every  member  is  an  auctioneer  as  well  as  a  possible 


THE  BROKER  AND  THE  BROKERS'  BOARD    275 


o         © 

I  0     ° 

©    ©    © 


customer.  As  a  board  is  a  central  point  to  which  are 
brought  the  buying  and  selling  demands  of  a  great  city  or 
of  a  country,  on  the  floor  of  the  board  may  be  heard  the 
concentrated  outcries  and 
the  uproar  of  auctioneers 
of  the  many  places  which 
otherwise  would  be  dealing 
in  stocks  and  bonds;  it  is 
this  that  makes  a  board- 
room seem  so  much  like 
bedlam.  On  the  floor  will 
be  found  the  brokers  rep- 
resenting leading  houses. 
At  one  side  of  the  room 
are  private  boxes,  in  which 
will  be  found  the  clerks  or 
operators,  who  have  direct 
communication  with  the 
offices  of  members  trading 
on  the  floor.  From  these 
private  boxes  the  business 
of  the  offices  will  be  com- 


Visitors'1  Gallery 


municated  to  the  floor- 
man,  and  purchases  or  sales  on  the  floor  will  be  returned  to 
the  several  offices.  On  the  wall  of  the  Philadelphia  Ex- 
change, beside  the  president's  chair,  is  also  an  electric  indi- 
cator, on  which  will  be  found  consecutive  numbers  repre- 
senting the  various  trading  numbers  of  members  on  the 
board  floor.  When  a  member  on  the  floor  is  wanted,  a 
button  is  pressed  and  a  light  flashes  out  the  number  of  this 
member,  to  which  he  at  once  responds.  The  member  on 
the  floor,  therefore,  has  to  have  his  eye  constantly  turned 
toward  the  indicator  as  well  as  keep  in  mind  the  whole  trad- 
ing situation  on  the  floor ;  besides,  he  must  keep  in  touch 
with  the  business  demands  of  the  office.  When  business  is 
brisk  this  is  a  difficult  part  to  play.  On  a  side-wall  of  the 


276  FINANCIAL  INSTITUTIONS 

board-room  will  be  recorded  the  transactions  (purchases  and 
sales)  of  the  local  market,  as  well  as  those  of  other  leading 
boards. 

The  facilities  for  business  and  the  business  transacted 
on  the  several  boards  are  very  largely  dependent  upon  the 
Or  anization  organization  of  the  broker's  office.  Customers 
ofthebro-  are  not  allowed  on  the  floor  of  the  board. 
ker's  office.  Tney  are  f  Qund  in  the  office  of  tbe  broker  jn 

what  is  known  as  a  board-room  (see  page  278),  usually  in 
the  rear  of  the  broker's  office,  are  tickers,  which  give  the 
quotations  and  the  transactions  on  the  several  markets 
almost  as  soon  as  the  business  itself  has  been  completed. 
The  customer,  therefore,  is  in  possession  of  the  facts  of  the 
market  practically  as  soon  as  the  broker  himself.  He  is 
also  in  touch  with  the  office  members  of  the  firm  ;  the  orders 
of  customers  for  purchase  and  sale  come  in  from  all  parts 
of  the  country  to  the  central  market. 

Considerable  of  mystery  surrounds  the  name  broker. 
This  is  partly  due  to  the  fact  that  the  ordinary  individual 
Thesxcu-  ^oes  not  ernpl°y  a  broker  to  make  purchases 
lative  side  of  and  sales.  When  he  wishes  to  purchase,  he 
broking.  gOe8  to  ft  merc]iant — j.  e.,  one  who  has  for  sale 
a  stock  of  things  desired.  When  he  wishes  to  sell,  he  sells 
directly  to  a  purchaser  without  the  intervention  of  a  special 
agent.  The  mystery  associated  with  the  name  is  in  a  meas- 
ure due  to  the  fact  that  a  considerable  part  of  a  broker's 
constituency  is  made  up  of  speculators.  The  facilities  given 
to  making  purchases  and  sales,  the  arrangements  for  the 
distribution  of  market  quotations  and  transactions  on  the 
various  central  boards,  bring  with  them  a  class  of  dealers 
who  endeavor  to  obtain  an  income  from  taking  advantage 
of  market  fluctuations. 

It  is  this  that  distinguishes  speculation  from  investment. 
An  investor  is  one  who  purchases  a  property  or  business 
interest  outright  as  a  result  of  judgment  based  on  "  what 
the  concern  has  earned."  His  profits  may  come  from 


THE  BROKER  AND  THE  BROKERS'  BOARD    277 

a  rise  in  value  of  the  property,  or  from  income  in  the  form 
of  interest  or  dividends,  but  in  the  last  analysis  it  is  depend- 

Distinction  ent  uPon  tne  mcome  or  prospective  income  of 
between  in-  the  property.  The  speculator,  however,  cares 
not  w^at  may  ^e  ^e  mcome-pr°ducing  power 
or  earning  capacity  of  a  business  concern.  All 
that  he  is  interested  in  is  a  market  fluctuation  ;  it  makes 
no  difference  whether  the  property  becomes  more  or  less 
valuable — which  way  the  fluctuation  may  go — so  long  as 
he  may  place  himself  in  a  position  to  take  advantage  of 
the  rise  or  fall.  Since  this  is  the  end,  and  what  one  may 
call  his  business,  it  is,  usually,  not  to  his  advantage  to  pur- 
chase and  pay  for  the  property.  He  would  so  use  his 
trading  capital  that  he  may  control  as  large  a  block  of  stock 
or  other  property  as  is  possible  for  the  purpose  of  getting 
the  benefit  of  the  change  in  price.  He  therefore  buys 
on  a  margin — a  margin  sufficient  to  give  him  control  for 
such  a  time  as,  in  his  judgment,  will  allow  of  a  fluctuation 
in  his  interest.  It  is  this  kind  of  buying  that  gives  rise  to 
a  large  part  of  the  business  of  broking.  It  is  to  this  class 
of  transactions  also  that  much  of  the  financial  uncertainty 
and  misfortune  of  the  past  and  the  present  is  attributable. 

If  one  should  go  to  a  broker's  office  day  after  day,  there 
will  be  found  a  constituency  in  the  chairs  of  his  board- 
Tjie  room,  or  going  in  and  out,  who  keep  an  eye  on 

speculative  the  market  to  which  may  be  traced  a  very  large 
constituency.  ,.  f  ,  .  ,  ;U,  -.  .  , 

portion  of  his  orders.     The  manner  in  which  a 

market  may  be  affected  by  these  speculative  purchases  may 
be  seen  from  a  glance  at  the  chart  on  page  280,  which  shows 
the  organization  of  a  single  broker's  business.  This  map, 
or  sketch,  represents  the  private  wires  connecting  the  vari- 
ous offices  of  a  single  concern  over  which  streams  of  orders 
flow  into  the  main  office  for  execution  and  which  find  their 
way  into  the  general  pool  on  the  board -floor.  When  fluctu- 
ations are  great  then  trade  is  brisk.  This  is  a  common 
observation.  Yet  this  trade  is  very  largely  a  speculative 


THE  BROKER  AND  THE  BROKERS'  BOARD    279 

one,  and  as  fluctuations  rise  and  fall,  the  capital  which  is 
used  for  speculative  margins  becomes  gradually  absorbed 
The  test  of  one's  ability  to  remain  in  the  speculation  is 
found  in  his  ability  to  keep  his  margins  good.  With  these 
speculative  orders  pouring  in  there  is  a  constant  flow  of 
capital  toward  the  financial  centers,  which  finally  find  their 
way  into  the  conservative  financial  institutions.  The  capi- 
tal drawn  from  the  purses  of  the  speculating  multitude  finds 
final  employment  at  the  hands  of  the  few  who  have  the 
prudence  and  judgment  necessary  to  conservative  commer- 
cial and  industrial  undertakings. 

As  a  means  of  accommodating  speculators  who  are  unable 
to  trade  on  large  margins  and  yet  who  are  anxious  to  gam- 
ble on  the  turn  of  the  "  wheel  of  fortune "  in 
tne  market,  a  class  of  business  has  been  organ- 
ized which  has  its  center  in  the  "  bucket-shop." 
This  is  nothing  more  nor  less  than  a  room  in  which  quota- 
tions are  given  representing  the  fluctuations  of  the  market 
which  allow  one  to  take  chances  on  price  movements.  In 
this  it  does  not  differ  from  the  regular  speculative  busi- 
ness in  the  broker's  office.  The  methods  differ,  however, 
in  that  the  ones  conducting  the  office  or  "  bucket-shop  "  are 
not  in  any  manner  regulated  by  a  board,  that  they  do  not 
have  their  commissions  determined  by  association  rules,  and 
that  they  take  margins  of  any  amount.  Instead  of  having 
a  wire  or  ticker  that  gives  the  official  quotations  of  the  cen- 
tral markets  in  a  language  that  may  be  understood,  and  that 
is  open  to  inspection,  the  bucket-shop  has  a  private  wire 
over  which  quotations  are  received  by  a  telegraph  operator. 
These  communications  may  not  be  read  by  the  customer,  as 
in  the  case  of  the  ticker,  and  therefore  the  operators  are  the 
only  ones  that  have  a  knowledge  of  what  is  going  on.  At 
one  window,  therefore,  will  be  a  margin-taker — one  who 
takes  the  money  of  customers  and  records  the  chances  taken. 
The  customer  will  then  take  a  seat  in  the  room  and  watch 
the  board  for  movements  in  his  stocks.  Thus  gambling  in 


THE  BROKER  AND  THE  BROKERS'  BOARD    281 

New  York  Central  the  stock  goes  up  two  points.  The  man 
who  sits  at  the  instrument,  beside  the  clerk  who  has  re- 
corded his  bid,  calls  out  to  the  boy  at  the  board  what  New 
York  Central  is  doing.  The  office  has  it  entirely  within  its 
own  power  to  say  whether  New  York  Central  goes  up  or 
down.  The  customer,  therefore,  is  in  a  gambling-house 
which  plays  with  loaded  dice.  In  case  there  are  others  in 
the  game  who  have  up  more  money  on  the  fall  of  New 
York  Central  than  he  had  upon  its  rise,  the  returns  will 
probably  be  declared  in  his  favor.  If  the  conditions  be 
otherwise,  he  may  have  his  margin  "  wiped  out,"  and  he 
will  then  be  left  to  reflect  upon  whether  he  will  "  try  the 
market  again." 


CHAPTER  XIV 
THE  INSURANCE  COMPANY 

IN  previous  chapters  the  nature  of  contracts  of  security 
has  been  fully  discussed.     Contracts  of  security  for  the 

payment  of  credit  obligations  are  specialized 
ofimurannce.  forms  of  insurance.  No  better  illustration  of 

concrete  insurance  may  be  found  than  the 
forms  of  personal  security  heretofore  discussed  as  indorse- 
ment and  guarantee.  Morgan  has  taken  notes  from  Gates 
for  the  payment  of  $300,000,  with  interest  at  5  per  cent 
per  annum.  He  offers  to  sell  these  to  Drexel  for  $305,000 
— terms  satisfactory — provided  that  Morgan  will  guarantee 
their  payment.  The  guarantee  of  Morgan  is  a  contract 
insuring  Drexel  against  loss  on  account  of  default  in  the 
payment  of  the  notes  by  Gates  when  due.  An  insurance 
policy  is  a  contract  wherein  the  insurer  takes  the  risk  in- 
cident to  the  happening  of  some  event  which  will  involve 
a  loss. 

The  risk  on  which  a  policy  is  taken  out  may  be  the 
non-payment  of  a  credit  instrument.      A  concern   whose 

business  it  is  to  issue  policies  on  such  risks  is 
insurance  called  a  Credit  Insurance  Company.  A  good 

example  of  such  a  concern  is  the  American 
Credit  Indemnity  Company  of  New  York.  During  the 
year  1900  this  company  took  risks  on  $15,229,031  of  credit 
contracts,  for  which  it  received  premiums  to  the  amount  of 
$453,420.  Its  losses  paid  were  only  $75,352— i.  e.,  about 
one-half  of  one  per  cent  of  the  risks  taken.  A  wholesaler 


THE  INSURANCE  COMPANY  283 

has  an  opportunity  to  sell  a  bill  of  goods  on  ninety  days' 
credit  to  a  retail  house  that  is  not  well  known  to  him.  He 
recognizes  a  profit  in  the  transaction,  but  does  not  care  to 
take  the  risk  of  losing  the  account ;  he  therefore  takes  out 
a  policy  from  a  credit  company  which  is  in  the  nature  of 
an  indorsement  of  the  credit  of  the  retail  concern.  To 
obtain  such  a  policy  the  wholesale  house  will  make  a  state- 
ment or  an  exhibit  of  its  books,  indicating  the  average 
loss  sustained  during  the  last  five  years  by  failure  of  pay- 
ment of  credit  accounts.  This  rate  or  proportion  is  taken 
as  a  marginal  allowance  or  "  self  -insurance " — i.  e.,  the 
wholesale  house  will  carry  its  own  risk  equal  to  the  average 
for  the  last  five  years.  In  consideration  for  the  premium 
paid,  the  credit  insurance  company  steps  in  and  carries  the 
risk  in  excess  of  this  amount.  The  company  may  require 
that  the  house  shall  sell  to  concerns  only  which  have  a  com- 
mercial rating  specified  in  the  policy ;  moreover,  it  may 
grade  the  premiums  according  to  the  ratings  of  customers. 
A  similar  form  of  insurance  is  that  undertaken  by  com- 
panies in  guaranteeing  the  accounts  of  building  contractors 
in  house-building  operations.  Instead  of  putting  the  re- 
tailer or  contractor  to  the  annoyance  and  necessity  of  hav- 
ing some  friend  guarantee  his  account,  the  wholesaler  or 
house-owner  pays  to  the  insurance  company  a  premium  as 
consideration  for  the  risk  undertaken,  and  then  makes  this 
a  part  of  the  purchase  price.  For  the  insurance  company 
to  have  undertaken  a  single  risk  would  have  been  as  dan- 
gerous as  for  an  individual  to  have  guaranteed  the  credit. 
Perhaps  the  loss  of  $75,000  incurred  by  the  company  above 
referred  to  in  the  course  of  its  year's  business  grew  out  of 
six  or  seven  contracts.  If  separate  individuals  had  under- 
taken and  sustained  these  losses  it  might  have  endangered 
their  business  and  brought  them  to  a  condition  of  insol- 
vency. The  insurance  company,  however,  suffered  a  loss 
on  only  one  risk  out  of  each  five  hundred  taken.  As  shown 
before,  the  premiums  received  from  the  four  hundred  and 


284  FINANCIAL  INSTITUTIONS 

ninety-nine  far  exceeded  the  amount  lost  on  the  one  policy 
where  credit  payment  was  not  made.  In  fact,  the  pre- 
miums received  by  the  company  during  the  year  exceeded 
the  losses  by  $380,000.  It  is  in  the  multiplicity  of  risks 
taken  and  the  experience  of  business  men  as  to  the  propor- 
tions of  losses  to  risks  taken,  that  a  basis  for  conservative 
judgment  is  found  ;  it  is  from  these  factors  that  proba- 
bility of  loss  is  determined. 

A  highly  specialized  form  of  credit  insurance  is  the 
Security  Insurance  Company.  In  this  the  policy  is  one  of 
The  Security  reinsurance  of  secured  credit.  The  contracts 
Insurance  of  security  to  credits  issued  are  entered  into  to 
ompany.  protect  purchasers  of  credit  instruments  against 
loss  from  non-payment.  These  credits,  together  with  their 
contracts  of  security,  which  are  given  to  assure  the  pay- 
ment of  the  credit  obligations,  are  then  taken  to  a  security 
insurance  company,  and,  the  risk  being  a  satisfactory  one, 
a  policy  is  issued  whereby  the  company  undertakes  to  in- 
demnify the  owners  of  these  secured  credits  against  any 
loss  uncovered  by  the  contracts  of  security.  In  other  words, 
the  insurance  company  guarantees  that  the  security  is  suffi- 
cient to  indemnify  the  owner  of  the  credit  contract  against 
loss  from  non-payment.  The  Bond  and  Mortgage  Guarantee 
Company  of  Brooklyn  is  a  concern  of  this  kind. 

A  holder  of  secured  credit,  however,  .may  feel  entirely 
safe  in  the  value  of  the  property  against  which  his  contract 
of  security  runs — that  is,  his  judgment  may  be 
insurance.  *^at  ^e  property  against  which  he  holds  a  lien 
may  be  adequate  to  provide  funds  with  which 
to  pay  the  credit  claim  held  by  him  in  case  the  debtor 
should  fail  to  meet  his  obligation  when  due.  The  only 
element  of  uncertainty  may  be  one  of  title.  He  is  not  in 
a  position  to  judge  whether  or  not  the  party  executing  the 
mortgage  has  a  perfect  title  to  the  property  against  which 
the  lien  is  given.  As  a  means  of  assuring  himself  of  this 
he  lays  the  transaction  before  a  title  insurance  company — a 


THE  INSURANCE  COMPANY  285 

concern  whose  business  it  is  to  search  titles  and  to  take 
risks  of  loss  for  failure  of  title,  and  to  pay  the  expense  of 
defending  adverse  claims.  Upon  investigation,  a  policy  is 
issued  and  the  holder  of  the  mortgage  is  placed  in  a  posi- 
tion of  increased  security.  Such  insurance  is  more  often 
taken  out  by  purchasers  of  real  estate.  A  company  of  this 
kind  usually  maintains  a  complete  set  of  abstracts  of  title 
to  the  real  estate  in  the  district  where  risks  are  taken  by 
them.  Being  in  a  superior  position  to  pass  judgment  on  the 
nature  of  the  risk,  it  may  oifer  a  low  rate  of  insurance  to 
the  customer  and  at  the  same  time  protect  itself  against  net 
loss  by  the  receipts  of  premiums  in  excess  of  the  amount 
paid  out  on  policies.  To  illustrate :  The  German-American 
Real  Estate  Title  Company  of  New  York  sustained  losses 
of  only  $25  for  the  year  1900,  while  during  that  time  it 
received  in  premiums  $17,668.  The  title  losses  of  this 
organization  from  the  time  of  its  organization  have  been 
only  $4,778,  while  the  total  premiums  received  by  the  com- 
pany have  amounted  to  $598,761.  The  rates  of  insurance 
offered  to  the  public  are  so  low  that  one  taking  lien  security 
or  purchasing  property  outright  can  well  afford  to  take  out 
a  policy  which  will  guarantee  him  against  individual  loss ; 
while  by  apportioning  the  losses  of  the  few  individuals 
among  the  many  insured,  the  company  is  enabled  to  pay 
expenses  of  administration,  maintain  a  large  title  plant, 
and  have  for  itself  a  remainder  in  profits  amounting  to 
something  like  7£  per  cent  per  annum  on  the  capital  in- 
vested in  the  business. 

There  may  be  as  many  different  kinds  of  insurance  as 
there  are  forms  of  risk.  Insurance  concerns  are  organized 
Different  around  risks  incident  to  honesty  or  business 
forma  of  fidelity ;  to  injuries  sustained  in  travel ;  acci- 
dent to  persons  employed  in  factories  or  other 
hazardous  callings;  to  sickness,  casualties,  and  death;  to 
risks  of  loss  to  property  from  fire,  wind,  lightning,  water, 
burglary,  breakage  of  glass ;  to  dangers  to  vessels  and  car- 


286  FINANCIAL  INSTITUTIONS 

goes  at  sea,  etc.  The  associated  companies  known  as  the 
Lloyds  recently  gave  a  notable  illustration  of  the  extent  to 
which  risk  undertakings  may  be  applied.  For  the  corona- 
tion of  King  Edward  YII  many  millions  of  dollars  were 
to  be  spent  in  decoration  arid  in  preparation  for  popular 
spectacles,  on  which  the  financial  return  depended  upon 
chances  of  weather,  the  health  of  the  sovereign,  and  many 
other  fortuitous  circumstances.  Before  undertaking  busi- 
ness of  this  kind — before  building  the  temporary  stands  for 
spectators,  placing  decorations  of  flowers,  and  arranging 
displays  of  perishable  goods  that  depended  upon  the  occur- 
rence of  the  event  at  a  certain  hour  and  place — business 
conservatism  suggested  the  shifting  of  the  risk  to  concerns 
whose  business  it  was  to  undertake  hazards  and  to  distribute 
loss  to  individuals  over  the  profits  of  the  many  and  make 
them  a  charge  against  such  profits.  Policies  on  this  event, 
it  is  said,  were  written  to  an  amount  exceeding  $50,000,000. 
The  variety  of  risks  undertaken  and  the  contracts  made  to 
cover  loss  may  be  illustrated  in  another  way.  In  the  single 
line  known  as  life  insurance,  there  are  issued  by  the  several 
hundred  companies  in  existence  something  over  150  different 
forms  of  policies,  each  of  which  is  a  slightly  different  form 
of  undertaking.  When  we  consider  the  various  classes  of 
risks  around  which  insurance  has  been  organized,  and  the 
various  forms  of  undertaking  within  each  class,  the  mag- 
nitude and  complexity  of  the  business  can  scarcely  be  com- 
prehended. 

Every  individual  insurance  policy  or  contract  is  a  spec- 
ulation.    It  is  a  speculation  of  the  most  fortuitous  kind — a 

T  , .  . ,     7      form  of  risk  that  a  conservative  business  man 

Individual 

risk  and  does  not  wish  singly  to  undertake.  In  consid- 
speculation.  eratiOn  for  a  premium  (a  very  small  portion  of 
the  amount  involved  in  the  risk),  a  company  undertakes  to 
become  responsible  for  loss  in  event  such  loss  occurs.  The 
company  is  in  no  better  position,  perhaps,  to  estimate  with 
business  certainty  the  happening  of  an  event  which  will 


THE  INSURANCE  COMPANY  287 

entail  loss  than  is  the  individual  himself.  Each  individual 
risk  is  a  speculation  to  the  company  in  the  same  sense  as  is 
a  margin  deal  in  a  bucket-shop  to  the  margin  taker. 
Neither  margin  giver  nor  margin  taker  can  tell  which  way 
the  market  will  go ;  neither  can  comprehend  to  an  extent 
which  will  enable  him  to  make  a  conservative  judgment  the 
facts  and  forces  which  affect  the  market.  Both  of  them 
are  certain,  however,  that  there  will  be  fluctuations  in  mar- 
ket price.  If  the  price  of  the  stock  dealt  in  goes  one  way, 
the  bucket-shop  will  get  the  margin ;  if  the  fluctuation  is 
in  the  other  direction,  the  transaction  yields  a  return  to  the 
customer.  If  it  were  possible  to  m::rk  out  the  course  of 
the  market  for  the  future ;  if  any  individual  could  procure 
the  data  of  business  and  could  so  well  understand  it  as  to 
allow  him  to  make  a  conservative  estimate,  then  for  him  a 
purchase  would  not  be  a  speculation.  It  is  here  proposed 
to  show  by  what  method  the  uncertainty  of  individual  risk 
is  reduced  to  a  collective  certainty — in  other  words,  how 
the  speculation  of  business  life  is  largely  reduced  by  the 
application  of  the  principle  of  collective  insurance. 

Each  individual  risk  is  based  on  a  highly  speculative 
uncertainty.     For  this  no  data  may  be  procured  by  which 
a  conservative  judgment  may  be  made.     Busi- 
ness   experience,    however,    has    shown    that 


insurance. 


among  risks  of  a  certain  class  the  percentage 
of  loss  is  a  fairly  constant  one.  For  example,  no  one  can 
tell  what  hour  a  particular  building  will  be  consumed 
by  fire ;  lightning  may  strike  it ;  spontaneous  combus- 
tion may  take  place  in  some  part  where  shavings  have 
been  left  by  the  carpenters  and  water  has  entered,  caus- 
ing fermentation  and  chemical  decomposition ;  a  mouse 
may  have  taken  a  match  to  its  nest  and  striking  it  with  his 
teeth  may  ignite  the  structure ;  a  lamp  may  be  exploded  ; 
an  electric  wire  may  emit  a  spark ;  a  hundred  possibilities 
are  present,  any  one  of  which  may  result  in  fire  entailing 
total  loss.  While  this  is  true  of  each  and  every  building 


288  FINANCIAL  INSTITUTIONS 

in  a  city,  it  has  been  found  by  experience  to  be  quite  as 
true  that  among  all  buildings  of  a  certain  class,  constructed 
of  similar  material,  existing  under  similar  conditions,  the 
percentage  of  fires  that  occur  within  a  given  time — let  us 
say  a  year — may  be  relied  on.  Among  buildings  of  one 
class,  one  out  of  a  thousand  will  burn  down  each  year. 
This  experience  gives  to  the  business  man  the  basis  for  a 
conservative  estimate— an  estimate  on  which  he  can  make 
a  calculation  of  aggregate  loss  that  serves  as  a  foundation 
for  one  of  the  most  conservative  of  financial  institutions, 
the  insurance  company.  With  each  class  of  insurance  the 
problem  for  the  manager  or  organizer  of  the  company  is 
one  of  so  adapting  its  capital  and  its  income  as  to  be  able  to 
meet  such  losses  as  occur  on  the  risks  that  his  company  has 
undertaken.  With  each  class  of  business  this  adjustment 
must  be  a  different  one,  and  must  be  based  on  experience 
that  lends  itself  to  a  calculation  that  amounts  to  a  business 
certainty.  But  having  made  such  an  arrangement,  he  may 
offer  to  those  members  of  the  community  who  may  suffer 
from  individual  loss  a  perfect  security  based  on  the  collec- 
tion of  sharing  results.  If  the  manager  of  the  company 
fail  in  such  adaptation,  or  provision  made  for  payment,  then 
he  is  holding  out  an  inducement  that  may  lead  his  customer 
into  a  snare. 

There  is  nothing  more  uncertain  than  the  continuance  of 
life  in  an  individual,  yet  this  uncertainty  and  the  risk  attend- 
The  principle  ms  ^e  have  been  reduced  to  a  problem  of  busi- 
of  life  ness  certainty  in  the  organization  of  the  life-in- 

nce'  surance  company.  In  1654  Pascal  and  Fermat 
evolved  the  mathematical  doctrine  of  probability,  and  in 
1671  De  Witt  applied  this  to  the  probabilities  of  human 
life.  It  remained,  however,  for  later  years  to  establish 
from  well-kept  records  and  classified  statistics  the  ratio  of 
death  incident  to  those  living  under  definite  conditions — a 
ratio  which  would  serve  as  a  premise  for  the  application  of 
the  theory  of  mathematical  probability  to  life  insurance. 


THE  INSURANCE  COMPANY  289 

The  result  is  what  is  known  as  the  mortality  tables.  These 
are  the  mathematical  conclusions,  based  on  experience,  as  to 
probability  of  death  among  various  classes  of  men.  While 
the  life  of  an  individual  man,  therefore,  is  uncertain,  yet  it 
may  be  counted  upon  as  a  certainty  that  15  deaths  will  occur 
among  a  thousand  men  twenty-one  years  of  age  who,  at 
the  time  risks  are  taken,  are  termed  "  healthy  lives."  As- 
suming that  a  company  were  to  issue  one  thousand  policies 
on  a  class  of  lives  on  which,  as  a  business  certainty,  16  poli- 
cies would  have  to  be  paid  the  second  year,  17  the  third, 
and  so  forth,  the  number  of  deaths  would  increase  each  year 
until  the  remainder  had  been  reduced  by  the  deaths  of 
something  like  twenty  years,  when  the  annual  mortality 
would  decrease.  Finally,  the  probability  is  that  between 
the  ages  of  90  and  100  years  the  last  of  the  one  thousand 
would  be  dead. 

To  apply  these  results  in  such  a  way  as  to  cause  those 
who  live  to  share  the  losses  on  those  who  die  is  the  problem 
TIi e  "natural  °^  n^e  insurance.  For  this  purpose  two  meth- 
pnntium"  ods  are  generally  employed.  The  first  is  that 
"'level  pre-  known  as  the  "  natural  premium  "  or  assessment 
mium"pl(in*.  method,  which  implies  that  upon  the  death  of 
each  member  of  a  society  or  group  of  insured,  those  who 
still  remain  in  the  society  or  group  will  contribute  a  pro 
Tata  in  order  to  pay  the  death  losses  on  those  who  have 
died.  If  each  of  one  thousand  takes  out  a  policy  for  $1,000, 
if  these  are  young  lives,  and  if  during  the  first  year  only 
three  out  of  the  thousand  die,  than  an  assessment  of  $3.01 
on  the  997  remaining  will  be  sufficient  to  pay  the  death 
claims.  Leaving  out  of  consideration  expense  of  adminis- 
tration, etc.,  the  purely  assessment  plan  is  an  application  of 
the  principle  of  pro-ration  of  loss  among  survivors.  The 
success  of  such  a  plan  depends  therefore  upon  keeping 
within  the  group  or  society  employing  the  plan  an  increas- 
ing number  of  members,  in  order  that  as  the  policy-holders 
attain  greater  maturity  of  years  and  by  death  drop  out,  the 


FINANCIAL  INSTITUTIONS 


assessment  may  not  rise  to  a  prohibitive  rate  ;  for  if  the 
society  does  not  increase,  with  each  death  the  number  of 
survivors  will  proportionately  decrease,  and  the  rate  of 
assessment  would  necessarily  rise  to  meet  future  losses  until 
the  last  survivor  will  be  required  to  pay  an  assessment  of 
$1,000  to  the  one  next  before  him,  and  he  himself  would 
be  left  without  protection. 

Many  examples  of   the  working  of   this  principle  are 
found  within  what  are  known  as  fraternal  and  assessment 
insurance  orders  that  provide  no  reserves  for 
Assessment      the    payment    of    death    claims.     The    Loyal 


•insurance. 


Mystic  Legion  of  America  is  an  association 
organized  in  1892.  The  record  of  death-rates,  together 
with  the  amount  of  insurance  in  force,  is  shown  in  the  fol- 
lowing table : 


YEAR. 

Amount  of  insurance  in  force. 

Death-rate  per  1,000. 

1897.            ... 

$5419000 

2  4 

1898 

5,90;!  000 

3.9 

1899 

6  :!50  000 

3  9 

1900 

7  753  000 

4.2 

1001 

8  560  500 

G  0 

Let  us  compare  with  this  a  society  that  was  organized 
in  1879  which,  as  to  insurance  in  force,  rose  to  a  high 
rank,  (had  outstanding  something  like  $130,000,000  in 
risks,)  but  which  in  later  years  has  been  losing  in  numbers, 
and  the  average  age  of  whose  members  has  likewise  largely 
increased.  An  exhibit  covering  the  same  period  shows  the 
following  result: 


YEAR. 

Amount  of  insurance  in  force. 

Death-rate  per  1,000. 

1897 

$51  612  500 

26-9 

1898 

44  023  500 

30.2 

1899 

37  294  500 

32.0 

1900 

17  073  500 

40.8 

1901 

10  736  500 

43.3 

THE  INSURANCE  COMPANY  291 

These  two  societies  may  serve  to  illustrate  the  extremes 
in  the  working  of  a  principle  that  is  as  certain  as  death 
itself.  As  stated  before,  the  success  of  such  an  organization 
depends  upon  the  numerical  increase  of  its  membership 
and  the  maintenance  of  a  low  pro  rata  of  old  lives.  When, 
however,  there  is  an  aging  of  members  or  a  decrease  in 
numbers  and  a  consequent  rise  in  the  rate  of  assessment, 
the  result  is  to  drive  out  the  young  and  healthy  lives  and 
leave  to  the  order  only  those  whose  age  or  decrepitude 
makes  it  to  their  interest  to  remain  and  renders  them  unac- 
ceptable to  other  companies. 

The   second   principle   around   which   the   business  of 
insurance  is  organized  is  that  known  as  the  "level  pre- 
mium" plan.    The  assessment  practise  is  based 
Ttte  reserve      on  w]mt  js  known  as  the  "  natural  premium  " — 
companies,          i        «       i  •       i  /•  1-111 

that  is,  the  sum  required  for  actual  death  losses 

incurred  from  year  to  year.  These,  as  before  noticed,  in- 
crease as  the  insured  grow  older.  The  level  premium  plan 
provides  for  the  collection  of  more  than  is  requisite  for  the 
payment  of  losses  in  the  earlier  years  of  the  policy  and  the 
accumulation  of  a  reserve  made  up  of  this  excess,  which, 
with  interest,  will  be  large  enough  to  make  up  the  defi- 
ciency of  later  years.  This  fund,  or  reserve,  is  invested, 
and  the  income  from  the  investment  is  set  apart  in  divi- 
dends to  increase  the  total  amount,  so  that  with  this  interest 
and  dividends  the  reserve  shall  be  $1,000  at  the  age  of 
ninety-nine  years,  this  being  considered  the  date  of  ter- 
mination of  all  policies.  No  better  expose  of  the  working 
of  this  principle  may  be  found  than  that  given  in  an  address 
by  Mr.  J.  W.  Hamer  before  the  Wharton  School  of  Finance 
of  the  University  of  Pennsylvania : 

"  As  the  reserve  upon  a  policy  increases,  the  amount  at 
risk  upon  that  policy  decreases — the  loss  incurred  at  death 
being  merely  the  difference  between  the  accumulated  re- 
gerve  and  the  face  of  the  policy. 

"  Perhaps  a  few  figures  will  afford  the  best  explanation. 


292  FINANCIAL  INSTITUTIONS 

"  The  ordinary  life  table  premium  at  age  twenty-one  is 
$17.90  per  $1,000,  reduced  by  dividends.  These  dividends, 
improperly  so  called,  are  not  profits,  but  savings  derived 
from  three  sources : 

"  1.  Collection  of  an  interest  rate  greater  than  the  as- 
sumption. 

"  2.  A  saving  upon  mortality. 

"  3.  A  saving  upon  expenses. 

"  The  salvage  from  these  items,  as  it  might  be  termed, 
is,  in  a  mutual  company,  ordinarily  applied  in  reduction  of 
the  gross  premium.  To  simplify  our  illustration,  however, 
I  will,  with  your  permission,  dismiss  further  consideration 
of  dividends  and  assume  that  there  are  none. 

"  Let  us,  then,  turn  back  to  the  annual  premium,  age  twenty-one  of,  $17.90 
Deduct  from  this  the  apportionment  for  expenses,  called  the 

'  loading,'  which  is 4.63 

Leaving  the  net  premium $13.27 

Out  of  this  net  premium  is  provided  the  cost  of  the  first  year's 

insurance 7.05 

The  difference $6.22 

is  the  sum  laid  by  at  interest  as  the  year's  contribution  to 
the  reserve,  reducing  the  amount  at  risk  from  $1,000  to 
$993.78. 
When  this  insured  member  has  reached  the  age  of  fifty,  he  is 

charged  the  same  net  premium  of 13.27 

The  cost  of  insurance  for  this  year  has  increased  to 10.10 

Leaving  contribution  to  '  reserve ' $3.17 

"Previous  years'  additions,  plus  interest,  have  raised 
the  reserve  on  this  policy  to  $303,  which,  deducted  from 
$1,000,  the  face  of  the  policy,  has  diminished  the  amount 
at  risk  to  $'597. 

"The  insured  member  having  attained  the  age  of 
seventy-five,  is  still  charged  the  same  net  premium  of 
$13.27.  His  reserve  has  reached  $680.07,  which,  deducted 
from  the  face  of  the  policy,  $1,000,  has  brought  the  amount 
at  risk  down  to  $319.93,  but  at  his  advanced  age  the  year's 


THE  INSURANCE  COMPANY  293 

charge  for  mortality  upon  even  this  small  sum  has  become 
greater  than  the  premium  available. 

"  The  account  is  then  made  up  as  follows : 

" Reserve  at  the  end  of  the  previous  year $680, 07 

Net  premium,  as  before $13.27 

Interest  added  to  the  reserve  . .  .27.73 


Total 41.00 


Which  also  added  to  the  reserve  makes  a  grand  total  of $721 .07 

Deduct  the  estimated  cost  of  insurance  for  the  current  year 

upon  $319 . 93 27.06 

and  you  have  a  balance  or  reserve  of $694 . 01 

reducing  the  sum  yet  at  risk  to  $305.99. 

"  The  same  process  is  continued  until  age  ninety-nine, 
when,  under  the  actuary's  table,  with  -i  per  cent  interest, 
the  reserve  equals  the  face  of  the  policy.  The  various 
tables  used  are  not  identical,  the  American  table,  for  in- 
stance, stopping  at  age  ninety- five." 

Many  kinds  of  policies  are  offered  involving  combina- 
tions of  assessment  and  reserve,  of  endowment  and  annuity, 
Application  or  ordinary  life,  tontine,  and  other  plans,  but 
of  the  two  through  them  and  in  them  all  may  be  found 
<>ne  <>r  both  of  these  two  principles.  The 
"  level  premium  "  plan,  with  its  reserve,  offers 
to  the  insured  a  perfect  security  against  loss  whether  mem- 
bership increases  or  decreases  so  long  as  the  reserve  be 
perfectly  protected,  and  the  laws  of  the  several  States 
have  been  framed  to  secure  this  end.  The  rate  of  insur- 
ance on  the  level  premium  plan  for  the  earlier  years  of 
the  policy  is  higher  than  that  of  the  assessment  or  "  natural 
premium"  plan,  yet  with  this  increased  rate  it  offers  a  se- 
curity which  eliminates  speculative  risk  involved  in  the 
futurity  of  the  company  itself. 

Other  plans  of  organization  and  adaptations  to  particu- 
lar lines  of  insurance  might  be  discussed,  but  the  few  pages 
here  given  to  the  subject  will  allow  of  nothing  more  than 
a  presentation  of  principles  involved.  The  enormous  re- 


294  FINANCIAL  INSTITUTIONS 

serves  kept  by  the  life  insurance  companies;  the  capital 
and  surplus  invested  in  fire,  marine,  and  other  forms  of 
Thefinancial  insurance  organizations ;  the  resources  that  are 
side  of  deemed  essential  to  security  and  to  the  elimina- 

tnsurance.  ^on  o;f  ^ie  e]ement  of  speculation  from  a  busi- 
ness whose  purpose  it  is  to  take  over  the  burdens  of  specu- 
lative risks,  have  all  contributed  to  make  insurance  com- 
panies the  largest  investors  and  the  most  conservative 
financial  concerns  in  business  life.  The  risks  undertaken 
by  insurance  companies  in  the  United  States  amount  to 
between  fifteen  and  twenty  billions  of  dollars.  The  re- 
sources in  the  hands  of  the  life-insurance  companies  alone 
on  January  1,  1901,  amounted  to  $1,754,662,712.  These 
companies  have  a  premium  income  of  $324,723,954  per 
annum,  and  from  tbeir  investments  an  additional  income 
in  the  form  of  interest  and  rentals  amounting  to  $75,- 
874,303,  making  a  total  annual  income  of  over  $400,- 
000,000.  In  capital  stock  within  ten  years,  from  1890  to 
1900,  the  increase  has  been  over  50  per  cent,  while  the 
annual  income  has  increased  from  $196,938,069  to  $400,- 
603,258.  The  expense  of  management  for  the  same  years 
increased  from  $44,190,352  to  $98,892,499.  The  excess  of 
income  over  expenditure,  including  death  losses,  for  the 
same  years  show  the  following  remarkable  increase:  In 
1890,  $62,729,898;  in  1900,  $133,023,157.  This  excess  of 
income  over  expenditure  indicates  the  enormous  increment 
that  is  annually  being  added  to  that  part  of  life  insurance 
based  on  the  level  premium  plan.  Within  the  ten  years 
above  mentioned  the  admitted  assets  of  the  76  companies 
now  operating  under  the  reserve  plan  has  increased  from 
The  invest  $770,972,061  to  $1,742,414,173 ;  in  other  words, 
mentsof  within  ten  years  they  have  added  one  billion 

insurance        dollars  to  their  assets. 

companies.  _,  ,          n      ,    ., ,    .        , 

These  assets  are  very  largely  held  in  the 

form  of  investments.  A  classification  of  investments  is 
as  follows : 


THE  INSURANCE  COMPANY  295 

Real  estate $158,119,116 

Mortgages 501,498,988 

United  States  bonds 7,190,565 

Other  stocks  and  bonds 794,631,743 

Collateral  loans 64,488,774 

Premium  notes  and  loans 88,500,575 

Total $1,614,429,761 

Besides  these  items  there  appears  among  the  assets  of 
companies  what  is  termed   "cash  in  office  and  in  bank." 

This  item  has  a  peculiar  status.     The  laws  of 
The  cash 
items  of          the  several  Mates  require  the  insurance  coin- 

msurance  panics  to  make  a  statement  of  investments, 
companies.  ,.  ,  .,.,.  .  ,  Al  . 

assets,  liabilities,  etc.,  in  order  that  there  may 

be  a  published  record  of  their  doings.  Furthermore,  the 
various  States  have  appointed  special  officerc  for  the  in- 
vestigation of  the  condition  of  insurance  companies  for 
the  protection  of  policy-holders.  In  the  rivalry  between 
insurance  companies  a  point  is  made  of  the  character  of 
their  assets.  Nearly  all  of  the  insurance  concerns  make 
advances  to  their  agents.  With  the  numerous  agencies 
scattered  through  the  country  small  advances  made  to 
each  will  amount  to  millions  in  the  aggregate.  In  order 
that  these  advances  may  not  appear  in  their  true  light 
— in  other  words,  that  it  may  not  be  placed  on  record  that 
they  are  doing  business  in  this  way — many  of  the  large 
insurance  companies,  being  in  control  of  hanking  institu- 
tions, take  to  the  banks  under  their  control  the  notes  of  the 
various  agents  on  which  advances  have  been  made  and,  for 
the  purpose  of  the  statement  made  to  the  public,  tempo- 
rarily discount  these  notes  and  have  the  amounts  entered  to 
their  account  as  cash  credits.  These  are  then  canceled  by 
the  return  of  the  notes  when  convenience  may  serve  after 
they  have  performed  the  service  intended.  While  this 
may,  in  ordinary  business  experience,  be  considered  an  ille- 
gitimate practise,  yet  the  practise  itself  has  arisen  very 
largely  out  of  the  rivalry  between  companies  and  the  tend- 
ency of  certain  unintelligent  inspectors  to  interfere  in 


296  FINANCIAL  INSTITUTIONS 

what  may  be  considered  a  legitimate  business  arrangement, 
and  one  which  does  not  necessarily  jeopardize  any  of  the 
interests  of  policy-holders  or  of  stockholders. 

With  the  enormous  holdings  in  stocks  and  bonds,  and 
with  investments  in  such  securities  limited  by  statute  of  the 
Insurance  several  States,  it  may  be  well  understood  how 
companies  as  it  is  that  what  are  called  "  gilt  edge "  stocks 
the  security  an(^  bonds  command  a  low  rate  of  interest  or 
dividend  return  on  market  price  paid.  The 
successful  investment  agent  or  investment  manager  of  a 
large  insurance  company  keeps  his  eye  constantly  open  for 
opportunity  to  invest  in  accredited  stocks  and  bonds  at  a 
rate  that  will  return  to  his  company  an  income  which  will 
produce  a  dividend  to  policy-holders  and  to  stockholders. 
Moreover,  a  certain  pro  rata  of  the  funds  of  insurance  com- 
panies are  loaned  to  speculators  on  what  may  be  termed 
"  call "  or  "  collateral "  loans.  These  have  as  collateral 
security  listed  stocks  and  bonds.  The  Equitable  of  New 
York,  for  example,  has  outstanding  on  collateral  loans  $25^- 
371,587,  over  one-third  of  all  the  collateral  loans  of  the 
combined  companies.  Let  us  suppose  that  a  margin  of  ten 
per  cent  is  allowed  between  the  market  price  of  securities 
held  as  collaterals  and  the  amount  of  advance.  For  a  com- 
pany safely  to  make  loans  on  a  kind  of  collateral  that  is 
constantly  fluctuating  with  the  movements  of  market  price, 
it  is  incumbent  upon  an  institution  making  such  loans — 
and  most  of  the  old  line  companies  do  make  advances  of 
this  kind — constantly  to  keep  watch  of  the  market  in 
order  that  the  margin  of  safety  may  not  be  impaired.  The 
usual  custom  is  for  such  a  company  to  have  a  corps  of  clerka 
whose  duty  it  is  to  keep  a  constant  record  of  all  the 
stocks  and  bonds  in  which  it  is  interested.  This  also 
serves  the  company  as  a  record  from  which  investment  cal- 
culations may  be  made.  Such  power  have  the  combined 
insurance  companies  in  the  market  that  were  they  to  con- 
spire to  such  an  end,  every  financial  concern  in  the  country 


THE  INSURANCE  COMPANY  297 

might  be  brought  to  a  condition  of  distress,  possibly  of 
bankruptcy.  On  the  other  hand,  with  the  strong  support 
of  such  companies  the  market,  financial  institutions,  and 
the  Government  itself  find  in  insurance  companies  the 
greatest  financial  security.  The  effect  of  the  enormous 
risks  undertaken  by  the  insurance  companies,  therefore,  is 
not  only  to  relieve  the  business  world  of  speculative  uncer- 
tainty in  the  numerous  relations  to  which  it  is  applied,  but 
also,  by  the  financial  conservatism  adopted  to  secure  this 
end,  the  investment  companies  assist  very  materially  in 
steadying  the  market  and,  in  time  of  strain,  relieving  finan- 
cial distress. 


INDEX 


Accommodation,  signature  to  note,  120 ; 

accommodation  mortgage,  156. 
A  ppropriation,  funds  obtained  by,  87, 88. 
Assignment  of  note,  121. 

Balance-sheet,  152. 

Bank  draft,  Bank  of  the  United  States, 
67. 

Bank  of  the  United  States,  illustration 
of  note  of  first  bank,  42 ;  illustration 
of  note  of  second  bank,  43  ;  illustra- 
tration  of  check  drawn  by  Andrew 
Jackson  on,  57  ;  illustration  of  check 
drawn  by  Daniel  Webster  on  the 
Boston  branch,  58  ;  draft  of,  67 ;  un- 
secured bond  of,  167. 

Bill  of  lading,  attached  to  draft,  143. 

Bonds  Form  of  bond,  163;  Trust 
Company  as  agent  of  sale  and  trans- 
fer of  bond  issue,  164;  private  bonds, 
165;  unsecured  bonds,  165;  how 
bonds  differ  from  other  credit  instru- 
ments, 169;  security  used  in  bond 
issues:  (1)  personal  security  of  in- 
dorsement and  guarantee,  169,  170; 
guarantee  of  Reading  Terminal  bond, 
171;  indorsement  of  bond,  172;  (2) 
lien  security,  trustee  necessary  to  lien 
security,  172;  who  may  be  trustee, 
173  ;  how  corporate  bonds  differ  from 
corporate  shares,  173 ;  real  -  estate 
bonds,  168,  174 ;  general  mortgage 
bond,  174 ;  general  mortgage  of  the 
Reading  Company,  175 ;  blanket 
mortgage  bonds  and  consolidated 
mortgage  bonds,  174-176 ;  divisional 
bonds,  176 ;  Collateral  Trust  bonds, 


176;  equipment  bond,  178;  car- 
trust  bond,  177-179;  car-trust  bond 
of  Railroad  Equipment  Company, 
177;  of  American  Transportation 
Company,  179;  debenture  bond  of 
Financial  Company,  179-189 ;  deben- 
tures of  railroads,  181  ;  income  bonds, 
and  how  they  differ  from  preferred 
stock,  181,  182;  purchase-money 
bonds,  183  :  improvement  bonds,  183 ; 
gold  bonds  and  legal-tender  bonds, 
183;  coupon  bonds  as  distinguished 
from  registered  bonds,  188;  payment 
and  extension  of  bonds,  185 ;  bond 
extension  contract,  188. 

Broker.  The  note-broker,  265 ;  foreign- 
exchange  broker,  268;  the  stock- 
broker, 269 ;  the  produce-broker,  269  ; 
other  forms  of  broking,  269. 

Broker  and  brokers'  board,  265-279. 

Broking.  Nature  of  broking  business, 
265 ;  organization  of  broker's  office, 
276 ;  speculative  side  of  broking,  276 ; 
distinction  between  investment  and 
speculation,  277  ;  the  speculative  con- 
stituency, 277 ;  board-room  of  Haight, 
Freese  &  Co.,  278 ;  the  bucket-shop, 
279  ;  chart  of  private  wires  of  Haight, 
Freese  &  Co.,  280. 

Bucket-shop,  279. 

Building  Loan  Association,  229-238; 
service  of  the  building  loan  associa- 
tion, 229;  distinguishing  features  of 
the  building  loan  association,  230 ; 
conditions  out  of  which  the  institu- 
tion arose,  231 ;  the  flrst  building 
loan  association,  the  growth  and  pres- 


300 


INDEX 


ent  importance  of  the  institution, 
232 ;  plans  for  making  loans :  (1)  loans 
at  fixed  rate  by  lot ;  (2)  sales  at  auc- 
tion on  bids  of  advance  interest ;  (3) 
awards  to  bidders  of  highest  pre- 
miums on  dues,  233 ;  plans  for  the 
distribution  of  profits,  234;  how 
profits  are  computed,  235,  236 ;  how 
profits  are  shared,  237  :  plans  for  the 
withdrawal  of  funds,  238. 
Business.  What  is  business?  3;  viewed 
as  a  contest  for  gains,  4 ;  necessity 
for  law  and  order  in  business,  4 ; 
business  law,  5 ;  elements  of  success 
in  business,  6 ;  funds  a  necessary 
part  to  business  equipment,  7  ;  rela- 
tion of  finance  to  business,  7-8. 

Capitalist,  definition,  12;  functions  of, 
90. 

Carnegie,  Andrew,  his  theory  of  trus- 
teeship as  applied  to  inheritances, 
83-85. 

Cashier's  check,  66. 

Certificate  of  indebtedness,  Chatta- 
nooga Savings  Bank,  46. 

Certified  check,  65. 

Cheque-bank  check,  65. 

Clearing-House  certificate,  46. 

Coal-shipper's  check,  61. 

Collateral  gold  certificates,  160,  161. 

Collateral  gold  receipt,  160. 

Collateral  note,  123,  124;  collateral 
judgment  note,  126. 

Collateral  trust  certificate  of  Asphalt 
Co.,  162. 

Commercial  Banks.  The  commercial 
bank  as  a  financial  institution,  240  ; 
obstacles  to  business  without  a  bank, 
241 ;  services  of  the  commercial  bank 
in  a  community,  240-247  ;  profits  of 
the  commercial  bank,  247,  248 ;  equip- 
ment of  the  commercial  bank,  249, 
250 ;  profits  derived  from  invest- 
ment of  salable  credit,  251 ;  kinds  of 
investment  it  may  make,  252,  253 ; 
magnitude  of  commercial  banking 
business,  254. 


Commercial  Paper.  Sales  of,  as  a  means 
of  obtaining  funds,  109-148  ;  promis- 
sory note,  111.  (See  Promissory 
Note.) 

Copper-sheet  money,  illustration,  19. 

Corporation.  Financial  advantage  of 
corporate  organization,  100 ;  corpo- 
rate shares,  96-108. 

Credit.  Definition  of,  30  ;  credit  funds, 
30-54 ;  instruments  of  transfer  of 
credit  funds,  5^76 ;  place  of  credit 
in  modern  finance,  74-76. 

Credit  funds.  Definition  of  credit,  30  ; 
illustrations  of  credit  uses,  30  ;  credit 
used  as  current  funds,  31  ;  essential 
characteristics  of  credit,  33  ;  princi- 
ples of  exchange  as  applied  to  credit, 
34 ;  value  and  price  of  credit,  35  ;  basis 
of  judgment  as  to  value  of  credit,  35  ; 
result  of  favorable  judgment  as  to 
value  of  credit,  36  ;  "  security  "  and 
its  relation  to  the  value  of  credit,  36, 
37  ;  credit  viewed  as  a  short  sale  of 
money,  37-41 ;  financial  uses  of  credit, 
41  ;  forms  of  credit  used  as  funds, 
41 ;  bank  credit,  42-45 ;  bank-notes, 
42-44 ;  bank  accounts,  45 ;  emergency 
bank  currency,  45,  46;  commercial 
emergency  currency,  47  ;  scrip,  47- 
50  ;  public  emergency  currency,  50- 
52;  commercial  credit  funds,  52-54; 
current  credit  accounts,  54;  mutual 
credit  accounts,  54 ;  transfer  of  credit 
funds  (see  Instruments  of  Transfer). 

"  Credit  the  drawer"  note,  118,  119. 

Crossed  check,  64. 

Definitions.  Business,  3,  4 ;  finance,  7 ; 
funds,  12;  maintenance  fund,  12; 
capital  funds,  12;  safe  deposit,  12; 
capitalist,  12;  financier,  12;  funded 
debt,  12  ;  a  dollar,  25 ;  a  silver  dollar, 
26 ;  greenback,  27 ;  national  bank- 
note, 27 ;  credit,  30 ;  credit  security. 
36  ;  short  sale,  37  ;  bankruptcy,  41 ; 
panic,  41 ;  capital  stock,  96 ;  stock 
certificate,  98;  common  stock,  100; 
preferred  stock,  104;  promissory 


INDEX 


301 


note,  111 ;  protest,  129 ;  commercial 
draft,  137 ;  mortgage,  153, 156  ;  bond, 
162;  insurance,  282;  investment, 
277 ;  speculation,  278. 

Dividend  check,  61. 

Documented  bill,  142-146. 

Dollar.  What  is  a  dollar?  25;  gold 
dollar,  25  ;  silver  dollar,  26. 

Emergency  currency  of  banks,  45 ; 
commercial  emergency  currency,  47- 
50 ;  public  emergency  currency,  50- 
52. 

Exchange  as  a  method  of  acquiring 
property,  2  ;  importance  of  funds  as  a 
medium  of  exchange,  3 ;  funds  ob- 
tained by  exchange,  89-191  ;  ex- 
change of  labor  for  funds,  90-92; 
exchange  of  tangible  property  and 
business  interests  for  funds,  92-108 ; 
exchange  of  commercial  credit  for 
funds,  KW-148 ;  exchange  of  long- 
time paper  for  funds,  149-191. 

Exchange  Bank  of  St.  Louis,  note  of, 
44. 

Finance.  Definition  of,  7  ;  the  relation 
of  funds  to  finance,  7  place  of  credit 
in  modern  finance,  74. 

Floor  plan  of  Philadelphia  Stock  Ex- 
change, 275. 

Funded  debt,  definition  of,  12. 

Funding,  example  of,  11;  limits  to 
funding  power,  89. 

Funds.  Importance  of  funds  for  ex- 
change, 3 ;  funds  as  a  part  of  busi- 
ness equipment,  7  ;  funds  the  subject 
of  finance,  7-6;  money  funds,  11-29; 
definition  of  funds,  12  ;  credit  funds, 
30-54;  instruments  of  transfer  of 
credit  funds,  55-7<> ;  how  funds  are 
obtained,  70-190 ;  funding  institu- 
tions and  agents,  195-297. 

Gift.  As  a  means  of  acquiring  prop- 
erty, 1 ;  the  method  of  non  -  in- 
dustrial and  dependent  members  of 
society,  79 ;  its  use  in  the  family 
organization,  79  ;  between  members 


of  tribes,  80 ;  for  .support  of  other 
non-industrial  groups,  80,  81;  gift, 
the  funding  method  of  dependents, 
81 ;  usually  takes  the  form  of  funds, 
82. 

Gift  and  inheritance,  funds  obtained 
by,  79-87 ;  industrial  importance  of 
gift  and  inheritance,  85. 

Guarantee,  as  a  form  of  personal  secur- 
ity, 122 ;  example  of  guarantee  by 
indorsement,  122  ;  guarantee  by  sep- 
arate writing,  122;  guarantee  as  a 
form  of  security  to  bond  issue,  169- 
174 ;  forms  of  guarantee  to  bonds, 
172  ;  insurance  as  a  form  of  guaran- 
tee, 282. 

Haight,  Freese  &  Co.,  Philadelphia 
board-room  of,  278 ;  chart  of  private 
wires  of,  280. 

Inheritance  as  a  form  of  gift,  82  ;  the 
assumption  on  which  inheritance 
rests,  82,  83;  principle  of  trusteeship 
applied  to  inheritance  by  Mr.  Car- 
negie, 83-85  ;  laws  of,  86. 

Instruments  of  transfer  of  credit  funds, 
55-76;  customer's  check,  55-62; 
form  of,  56  ;  manner  of  drawing,  56- 
59 ;  check  of  Andrew  Jackson,  57 ; 
check  of  Daniel  Webster,  58  ;  checks 
drawn  for  special  purposes :  for 
wages,  60  ;  dividend  check,  61  ;  coal- 
shipper  check,  fil ;  safety  devices  in 
checks,  61  ;  receipts  used  as  checks, 
62 ;  power  of  attorney  to  draw,  62, 
63 ;  the  crossed  check,  63, 64  ;  cheque- 
bank  check,  65  ;  certified  check,  65  ; 
cashier's  check,  66 ;  bank  draft,  66, 
67 ;  letter  of  credit,  67-70 ;  money 
order,  68;  traveler's  check,  70-73; 
interchangeable  bank  money-order, 
73, 74. 

Insurance.  Meaning  of  insurance,  282 ; 
guarantee  of  payment  of  promissory 
note  a  species  of  insurance,  the  es- 
sentials of  an  insurance  policy,  282. 

Insurance    Company.     Credit    insur- 


302 


INDEX 


ance,  282 ;  risk  involved  on  account 
of  non-payment  of  contracts,  the 
credit  insurance  company,  282,  283 ; 
the  principle  of  community  responsi- 
bility applied  to  credit  insurance, 
284;  the  security  insurance  com- 
pany, 284 ;  the  insurance  company  a 
guarantee  of  sufficient  security  for 
payment  of  credit  contracts,  284;  title 
insurance,  284;  advantages  of  this 
form  of  guarantee,  285 ;  equipment  for 
title  insurance,  285 ;  other  forms  of 
risk  made  the  basis  of  insurance,  the 
speculative  character  of  individual 
risk,  and  the  certainty  of  calculation 
as  to  collective  risks,  286  ;  safety  of 
insurance  based  on  principle  of  col- 
lective risk,  287  ;  the  effect  of  insur- 
ance to  relieve  the  business  commu- 
nity of  speculative  individual  risk, 
288  ;  application  of  principle  of  col- 
lective risk  to  life  insurance,  288; 
the  mortality  table  the  scientific  basis 
of  life  insurance,  289  ;  two  methods 
of  enforcing  collective  financial  risk  : 
(1)  the  "assessment  method,"  (2) 
the  "  level  premium  "  plan,  289 ;  con- 
ditions under  which  the  assessment 
method  may  be  applied,  290  ;  applica- 
tion of  the  level  premium  plan,  291 ; 
the  reserve  as  an  incident  to  this  plan, 
291-297  ;  financial  side  of  insurance, 
294;  investments  of  insurance  com- 
panies, 294-295  ;  significance  of  what 
are  known  as  "cash  items,"  295  ;  in- 
surance companies  as  factors  in  the 
security  market,  296,  297. 

Insurance  policy  attached  to  bill  of 
lading,  144. 

Investment  distinguished  from  specu- 
lation, 277. 

Invoice  accompanying  documented 
bill,  142. 

"  Ironclad  "  note,  123. 

Jackson,  Andrew,  check  on  Bank  of 

the  United  States,  57. 
Judgment  note,  125. 


Labor.  Exchange  of  labor  for  funds, 
90 ;  the  problem  of  the  laborer,  90, 
91 ;  saving  as  a  means  of  obtaining 
capital,  91 ;  importance  of  education 
and  industrial  training  to  the  laborer, 
92. 

Lease.  Kelation  of  the  lease  to  funding 
methods,  189 ;  the  lease  as  security 
for  credit,  190 ;  uses  of  the  lease  by 
credit  stores,  1 90 ;  dangers  from  lease 
purchasers,  191. 

Letter  of  credit,  69 ;  draft  list  to  letter 
of  credit,  70. 

Long-time  Paper.  Long-time  credit  used 
to  obtain  funds  for  capital  employ- 
ment, 149  ;  illustrations  of  difference 
between  long-time  and  short-tima 
credit,  150 ;  difference  in  character 
of  security,  151 ;  classes  of  long-time 
credit:  (1)  mortgages,  153-161;  (2) 
bonds,  162-185. 

Memorandum,  of  note  purchase,  267 ; 
of  note  sale,  267. 

Memorandum  note,  124. 

Mint,  (See  Treasury  of  the  United 
States.) 

Money  Funds.  Definition  of  funds, 
12 ;  essential  characteristics  of  money, 
13,  14;  conditions  on  which  funda- 
bility  and  value  of  money  depend, 
14-16  ;  things  that  have  been  used  as 
money,  16-21;  the  development  of  a 
standard,  22;  the  decimal  system, 
24;  money  system  of  the  United 
States,  25-29. 

Money-order  of  Adams  Express  Co., 
68 ;  interchangeable  bank  money- 
order,  74. 

Money  system  of  the  United  States,  25 ; 
gold  coins  of  United  States,  26 ;  sil- 
ver coins,  26 ;  minor  coins,  26 ; 
United  States  notes,  27;  national 
bank-note,  27;  gold  certificates,  27; 
silrer  certificates,  28;  Treasury  notes 
of  1890,  28 ;  currency  certificates,  28 ; 
fractional  currency  notes,  28 ;  uni- 
formity of  value  of,  29. 


INDEX 


303 


Mortgage  notes,  154. 

Mortgages.  The  term  as  used  in  the 
security  market  a  misnomer,  153 ; 
illustration  of  mortgage  note,  154; 
mortgage  contract,  155;  mortgages 
without  separate  notes,  156;  accom- 
modation mortgages,  156 ;  chattel 
mortgages,  157 ;  farm  mortgages, 
157  ;  mortgages  on  business  property, 
159  ;  on  mines  and  timber-lands,  159 ; 
parti -mortgages  receipt,  161. 

Parti-mortgage  receipt,  158. 

Partnership— sale  of  partnership  in- 
terest for  funds,  95. 

Philadelphia  Savings  Fund  Society, 
224. 

Power  of  attorney,  Daniel  Webster 
to  his  wife,  to  draw  checks,  63. 

Promissory  Note.  Definition, 111 ;  form 
of  note  as  to  parties,  .111,  112:  as  to 
words  of  transferability,  113;  as  to 
words  of  promise,  114;  as  to  date  of 
making  note,  115;  as  to  signature, 
11G  ;  non-essential  clauses  of  promis- 
sory note,  117;  "credit  the  drawer" 
notes,  118,  119 ;  parts  of  note  contain- 
ing contracts  of  security,  120;  ac- 
commodation signatures  and  indorse- 
ment, 120,  121  ;  guarantee  of  note, 
122;  collateral  note,  123  ;  memoran- 
dum collateral  note,  124;  judgment 
note,  125;  collateral  judgment  note, 
126;  presentation  for  payment,  non- 
payment, and  protest,  126-132. 

Property,  development  of  the  idea  of, 
to  respect  for  "  rights  of  property," 
race  importance  of,  1  ;  how  property 
may  be  acquired  from  others:  (1)  by 
gift;  (2)  by  exchange,  1,  2. 

Protest  of  note,  130;  notarial  notice  of 
protest,  130;  notarial  certificate  of 
protest,  131. 

Receipt  cut  for  money  deposited  on 
bond  purchase,  165;  on  purchase  of 
Glen  Echo  Railroad  bends,  166. 

Receipt  used  as  check,  62. 


Receiver's  Certificates.  Their  nature 
and  their  uses,  187;  distinguished 
from  bonds,  187 ;  security  for,  188 ; 
advantages  of  use,  189. 

Release  from  liability  on  indorsement, 
266. 

Savings  -  Bank,  209-228 ;  successful 
business  based  on  service  rendered, 
209-211;  increased  profits  the  result 
of  increased  capital,  211  ;  savings  as 
a  means  of  obtaining  capital,  212- 
214;  service  of  the  savings-bank: 
(1)  safe-keeping  of  funds  saved;  (2) 
investment  of  savings  in  a  form  to 
make  them  productive  of  income, 
215,  216;  conditions  giving  rise  to 
savings  institutions,  216 ;  first  sav- 
ings-banks, 217  ;  the  safe-keeping  of 
funds,  218;  the  investment  of  sav- 
ings, 218,  219;  how  to  deal  with  a 
savings-bank,  221 ;  rules  governing 
investment  of  savings-banks:  (1)  as 
to  safety  of  investment;  (2)  as  to 
rate  of  income,  223 ;  Philadelphia 
Savings  Fund  Society  and  the  Na- 
tion's Bank  of  Savings  of  Allegheny, 
224;  mutual  and  joint-stock  savings- 
bank,  225,  226 ;  relations  of  savings- 
banks  to  the  money  system  :  (1)  re- 
duction of  the  amount  of  money  kept 
in  hoards ;  (2)  influence  on  redemp- 
tions of  the  Government;  (3)  the 
savings-bank  as  purchaser  of  securi- 
ties, 226  ;  relation  of  savings-banks 
to  other  financial  institutions,  227, 
228. 

Scrip.  Of  Easton  &  Wilkesbarre 
Turnpike  Co.,  47  ;  sutler's  scrip,  47 ; 
store  scrip,  48 ;  Camden  &  Wood- 
bury  Railroad  scrip,  48;  Chesapeake 
&  Ohio  Canal,  49;  Marion  Change 
Association,  49;  dividend  warrant, 
50;  town  scrip,  Fayetteville,  Ark., 
51 :  Port  Deposit,  Pn.,  52. 

Securities.    (See  Long-Time  Paper.) 

Securities ;  definition  of,  36 ;  relation 
of  security  to  valuation  of  credit,  36, 


304 


INDEX 


37 ;  parts  of  promissory  note  contain- 
ing contracts  of  security,  120-126. 

Shares.  (See  Stock.)  Sale  of  corporate 
shares,  95 ;  difference  between  cor- 
porate shares  and  partnership  inter- 
ests, 98. 

Shinplasters.    (See  Scrip.) 

Silver-sheet  money,  illustration,  23. 

Speculation,  distinguished  from  in- 
vestment, 277. 

Stock.  Illustration  of  share  in  Bank  of 
the  United  States,  97  ;  common  stock 
of  Dnited  States  Steel  Co.,  99 ;  non- 
cumulative  preferred  stock,  101 ; 
common  stock  of  Gramercy  Finance 
Co.,  102  ;  preferred  stock,  cumulative, 
of  Gramercy  Finance  Co.,  103 ;  sig- 
nificance of  common  stock,  100;  of 
preferred  stock,  104 ;  first  and  second 
preferred  stock,  106  ;  cumulative  and 
non-cumulative  preferred  stock,  106; 
trust  certificates,  108 ;  other  forms  of 
stock,  108. 

Stock  Exchange.  Stock-brokers,  269  ; 
brokers'  boards,  270 ;  history  of  stock- 
exchanges,  Philadelphia  board,  270; 
London  Stock  Exchange,  270  ;  New 
York  Stock  Exchange,  271  ;  Consoli- 
dated Stock  and  Petroleum  Exchange, 
272 ;  organization  of  a  stock  ex- 
change, 273,  274;  floor-plan  of,  274, 
275. 

Tioga  County  Bank,  note  of,  44. 

Traveler's  Check  Of  American  Express 
Co.,  70;  of  Brown  Bros.,  71,  72;  of 
Knauth  Nachod  &  Kiihne,  73. 

Treasury  of  the  United  States,  195- 
208;  relations  of  Treasury  to  mod- 
ern systems  of  finance,  195 ;  its  mon- 
etary functions:  (1)  coinage,  196; 
^2)  providing  a  complex  system  of 
money  ;  (3)  maintenance  of  a  stand- 
ard as  a  means  of  securing  uniform- 
ity of  value,  197  ;  the  redemption  of 
paper  money,  198;  machinery  by 
which  the  three  monetary  functions 
of  Government  are  performed :  (1) 


a  mint  for  giving  stamp  and  genuine- 
ness to  coins ;  (2)  a  redemption 
agency  for  the  free  interchange  of 
different  forms  of  money  ;  (3)  a  rev- 
enue department  to  provide  and 
maintain  funds  in  reserve,  198  ;  his- 
tory of  the  Independent  Treasury, 
199-200;  work  of  its  redemption 
agency,  201-203  ;  the  mint,  its  work, 
and  organization,  203-205;  revenue 
department  of  the  Treasury  ;  relations 
of  revenue  to  reserve,  205 ;  possible 
demands  on  the  Treasury  for  gold, 
206 ;  sources  of  revenue  :  (1)  taxa- 
tion; (2)  sales  of  quick  assets;  (3) 
sales  of  bonds  of  the  Government, 
207 ;  inadequacy  of  taxation,  207 ; 
unavailability  of  quick  assets,  208; 
bond  sales  the  only  adequate  revenue 
power  in  time  of  strain,  208  ;  relation 
of  Treasury  to  private  credit. 

Trust  certificate,  108;  of  Standard  Oil 
Co.,  105 ;  first  preferred,  of  Heading 
Co.,  107. 

Trust  Company.  As  agents  of  sale  and 
transfer  of  bond  issue,  164;  service 
of  the  trust  company,  256  ;  its  econo- 
mies, 257 ;  conditions  out  of  which 
institutions  arose,  258 ;  methods  of 
organization,  258;  legal  steps  re- 
quired in  New  York,  259, 260 ;  general 
trust  powers  granted,  261 ;  fiscal 
powers  of  the  trust  companies,  262  ; 
investment  powers,  262,  263  ;  growth 
of  business  of,  263 ;  double  invest- 
ment relations  of,  2(53,  264. 

Value  and  price  of  credit,  35;  basis  of 
judgment  as  to  value  of  credit,  35; 
result  of  favorable  judgment  as  to 
value  of  credit,  36 ;  security  and  its 
relation  to  the  value  of  credit,  36,  37. 

Wages  check  of  Lehigh  Valley  Rail- 
road, r.o. 

Webster,  Daniel,  check  on  Boston 
Branch  of  Bank  of  the  United  States. 
58. 

(15) 


A     000019082     7 


